Radio: The Johnny Vaughan Williams deal

Consolidation in the radio sector has been on the cards since the Communications Act came into force at the beginning of this year. Last week, after months of speculation, leading radio groups GWR and Capital confirmed plans for a £711m merger.

The deal will bring GWR's national Classic FM station together with London's biggest commercial radio broadcaster, Capital. It's Vaughan Williams meets Johnny Vaughan. More than 50 local stations plus about 90 digital radio offerings come under one roof. Collectively, the new group will have 18 million listeners and 36 per cent of the radio advertising market.

Apart from the Midlands, where GWR owns Leicester Sound and Capital runs Century 106 FM, there is little overlap between the two companies' radio assets, making it a dream deal for the regulators. The two make such obvious partners that industry observers wonder why it's taken them so long to announce their intentions.

GWR executive chairman Ralph Bernard, who assumes the same role in the merged company, says he's spent the months since January honing the marriage proposal. "We wanted to get it right and have put months of work into this merger," he says. "The announcement is the culmination of that effort, and we feel this is the right time to merge."

Under the terms of the Communications Act, the Office of Fair Trading and the media regulator, Ofcom, will scrutinise the merger, but Bernard does not anticipate a referral. "We are convinced this transaction will enable the enlarged group to offer more attractive products and services to our listeners and advertisers," he says.

Capital Radio chief executive David Mansfield, who is also taking the same role in the new group, is even more bullish. "We think it's fair to assume we're doing what the Government intended," he says. "We're following the spirit of the Communications Act, encouraging consolidation in radio."

Unlike many of the groups which could pool radio interests since the relaxation of ownership rules, such as Emap and Guardian Media Group, GWR and Capital are radio-only players. Bernard believes this is another unique selling point in selling the merger to stakeholders, including the regulators. "The deal creates the UK's leading pure-play commercial radio group, ideally positioned to benefit from the strong growth of the commercial radio sector," he says.

Top of the list of priorities for the new company is increasing commercial radio's share of the overall market, relative to the BBC, which continues to dominate listening. But that ambition raises concerns about how the new company could dominate the market for radio ads. Mark Priestley, board director of Carat, one of the biggest media-buying agencies, welcomes the deal, but wants to know how it will affect sales policy.

Mansfield aims to reassure. "There's no assumption that anything will change on pricing policy. Pricing is led by demand," he says. "We think we'll be able to attract more revenue simply by driving up audiences. We'll also be able to offer advertisers greater opportunities along the lines of Capital FM's deal with Kellogg's to sponsor the breakfast show, which we extended to all our breakfast shows."

But a particular worry is the potential for conditional selling by the new group, whereby ads on one station are only offered if the advertiser buys airtime on another channel. Again Mansfield is sanguine: "Our sales teams are incentivised to sell advertisers into as many stations as possible, but conditional selling is outlawed at Capital. I'm sure it doesn't take place at GWR," he insists.

Mark Leggatt, account director at media planning and buying agency Mindshare, which handles radio advertising for brands such as Nescafé, wonders whether the GWR/Capital managers believe radio can be readily substituted by other forms of advertising.

Over the past 10 years, radio's share of advertising has grown from 2 per cent to 7 per cent, making it more of a must-have for blue chips such as Procter & Gamble. Leggatt explains: "If they say yes, radio can be substituted, then all of the advances of the past 10 years have been for nothing. If they say no, that's a bit worrying, given they'll have 40 per cent of the market."

Mansfield is careful to soothe fears of market dominance. "Radio is substitutable enough for the competition authorities to recognise that the medium does not compete with itself," he says, adding: "We don't recognise such a thing as the radio advertising market but actively compete with other media to win a share of advertising budgets."

Continuing to compete effectively over the coming months as Bernard and Mansfield bring their two companies together will be crucial to the success of the new company - particularly given that, by the time it's complete, other players such as Emap and Scottish Radio Holdings may have announced their own union.

Richard Wheatley, a former head of Jazz FM and founder of the Local Radio Company, which is buying up local stations, says: "This is a big, complex deal. Are they worried about keeping up morale and sales momentum during that tricky period?"

Mansfield says the merger plans include a budget for retaining people. "We're trying to make people as secure as possible, so we're incentivising people in areas that are particularly at risk like national sales and where resources are duplicated," he says.

The biggest duplication is at the head offices of both companies - but with the bulk of the two companies' operations taken up by local radio, overlap isn't a huge issue. The only remaining question, according to one director of a rival radio broadcaster, is how committed the new company will be to maintaining truly local services. Or will economies of scale prevail?

Mansfield is prepared for the question: "We have local management teams at each of our local stations and the programming they transmit reflects what's going on in the local community. We have local charities we work with and local news teams."

But it's tempting to read a slightly different agenda between the lines of his next reply. "The real trick is to make sure that the things that are done centrally are done for the benefit of the listener," he says.