The completed acquisition by Scottish Radio Holdings plc and GWR Group plc of Galaxy Radio Wales and the West Ltd

No. ME/1550/02

Report under section 125(4) of the Fair Trading Act 1973 of the Chairman's advice dated 2 May 2003, to the Secretary of State for Trade and Industry under section 86(1) of the Act

BACKGROUND

Vibe Radio Services Ltd (VRSL) is a joint venture company set up to act as a holding company for the acquisitions of Eastern Counties Radio Ltd and Galaxy Radio Wales and the West Ltd (now known as Vibe 101). The media group Scottish Radio Holdings plc (SRH), owns 51 per cent of VRSL. It owns radio stations in Scotland and Northern Ireland and two stations in England (Cumbria and Southampton). The remaining 49 per cent of VRSL is owned by GWR Group plc (GWR), a commercial radio broadcasting group which owns and operates the national station Classic FM, 32 local stations (including GWR FM (Bristol and Bath), and Orchard FM), three digital radio stations and two internet services.  GWR's sales house (Opus) sells airtime for the GWR group, as well as for other independent radio stations. Vibe 101 was formerly owned by Chrysalis. The acquisition was completed on 30 September 2002. The OFT advised you that the completed acquisition raised competition concerns in the supply of radio advertising in the Bristol and Bath area and that it should be referred to the CC for investigation, which your Competition Minister did on 13 January 2003.

JURISDICTION

The CC concluded that a merger situation qualifying for investigation had been created on the basis of the share of supply test in the United Kingdom, in respect of the supply of local radio advertising in the Severn Estuary licence area.

COMPETITION ISSUES

The CC concluded that the relevant markets are the supply of local radio advertising in Bristol and Bath, and the supply of local radio advertising in Taunton and Yeovil.  Prior to the merger Galaxy/Vibe 101 was competing with both GWR FM (Bristol and Bath) and Orchard FM (operating in Taunton and Yeovil) for advertisers. The CC concluded that the merger reduces choices available to companies advertising on local radio in Bristol and Bath, and in Taunton and Yeovil, leaving them vulnerable to price increases.  

In addition, the CC concluded that the merger adversely affects other radio stations in the area in two respects. First, GWR's sales house (Opus) will now sell advertising airtime on four stations in the area, i.e., GWR FM (Bristol and Bath), Orchard FM, Classic Gold 1260AM and Vibe 101. Secondly, GWR will be able to offer differential prices by bundling advertising packages and cross-selling between different stations.

The CC believed that there were no benefits to the merger that would sufficiently offset the adverse effects identified.

REMEDIES

The CC considered a number of structural remedies involving rights in and ownership of Vibe 101, VRSL and Opus's airtime sales contract.

GWR argued that any requirement that GWR either exit VRSL and for Opus to cease selling Vibe 101's airtime, or for VRSL to divest Vibe 101, would be disproportionate given the limited competition concerns identified by the CC.

The CC rejected GWR's proposal to undertake not to bundle advertising rates between different stations and areas because it would involve excessive regulatory intrusion to ensure that separate rates charged for advertising at particular times at each station were not unduly low, and as it would not address the weakened competitive position of other local radio stations.

GWR's offer for Opus not to sell local advertising airtime on Classic Gold 1260 AM was rejected. The audience profile of Classic Gold 1260 AM means that it is a less direct substitute for GWR FM (Bristol & Bath) than Vibe 101. In addition, such a remedy would be a significant disadvantage to Classic Gold Digital as it would have to make separate arrangements for only one of its stations. Also, Opus could redirect advertisers wanting Bristol and Bath coverage to other GWR stations, rather than to the alternative Classic Gold sales house for the area.

The CC also considered the possibility of suspending GWR's rights under the VRSL joint venture shareholders' agreement, without reducing the shareholding. However, given the co-location of Vibe 101 and GWR in the same premises, and GWR's membership of the VRSL board, the CC concluded that this proposal would leave GWR with material influence over Vibe 101. 

GWR suggested that an approved independent third party sell Vibe 101's airtime, but GWR could still influence the position and strategy of Vibe 101, including the extent to which it overlapped with the GWR stations and the competition between them. Also, as the current revenue sharing agreement would continue to reduce competition between the two stations this was not accepted by the CC.

As a result of the above considerations, the CC's preferred remedy comprises three requirements. First, GWR should reduce its interest in Vibe 101 to no more than a 24.9 per cent interest in the VRSL joint venture together with having only minority protection rights. The CC describes minority protection rights as those required to safeguard a financial interest which include the right for its shareholding not to be diluted without consent, and the ability to protect its revenue from Vibe 101 including the right of veto over transactions between VRSL and SRH. These rights, however, do not include the right to appoint directors, any involvement in or the approval of the budget or business plan of Vibe 101, or any access to confidential information. They also exclude SRH from having a guaranteed return arrangement as this reduces competition between GWR and Vibe101.  Alternatively, a reduction of GWR's interest in Vibe 101 could be achieved by the VRSL joint venture reducing its interest in Vibe 101 with the same additional restrictions described above. Second, GWR must satisfy the OFT that any interest it retains in Vibe 101 must not confer material influence over Vibe 101.  Finally, Opus should not sell Vibe 101's airtime. The CC believes no other set of remedies would adequately address the adverse effects of this merger.

ASSESSMENT AND RECOMMENDATION

The CC found that the completed merger was likely to give rise to adverse effects in the market for the supply of local radio advertising in Bristol and Bath, and also Taunton and Yeovil. (Competition concerns in relation to Bristol and Bath were the main reason why the OFT recommended reference of the merger, but the further information available to the CC has provided it with extensive evidence on the adverse effects in respect of Taunton and Yeovil.) The CC has also concluded that the ability to sell airtime for a number of local stations weakens the position of other local radio stations to compete. 

The CC concluded that there are no benefits to this merger that would sufficiently offset the adverse effects identified. 

The OFT agrees with the CC's reasoning and conclusion that the remedy set out above is proportionate and requisite to address the adverse effects that have been identified.

The OFT therefore recommends that you invite us, under section 88 of the FTA, to obtain suitable undertakings from GWR in relation to the proposed remedy outlined above.

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