SMG reeling as shares slump after criticism

Published on Sunday 21 October 2007 01:03

SMG is maintaining a "business as usual" response to a collapse in its share price that has left the company worth little more than it was hoping to get from the sale or flotation of Virgin Radio.

A bearish analyst's report on the media sector was blamed for a slump in the shares to a close of just 27.75p, valuing the company at 88m. SMG was pinning its hopes on selling Virgin Radio for between 60m and 75m to help clear its debts.

Rob Woodward, who was installed as chief executive in a boardroom coup in the spring, wants to create a business focused around television, but he has been hindered by the crisis in the financial markets which forced the postponement of the flotation, and subsequent sale, of Virgin Radio.

The circular from Numis Securities' analysts Lorna Tilbian and Paul Richards, published on Thursday, identified free-to-air broadcasters in television and radio, such as SMG, ITV and GCap (owner of Capital Radio and Xfm), as most vulnerable to another downturn in equities.

"Groups in this sub-sector are early cycle, operationally geared, face structural challenges, carry debt and are highly rated," says the note.

"We believe there are material structural threats to free-to-air broadcasters, both in television and radio. In our view, the outlook for subscription services is much brighter, with more homes continuing to take digital television ahead of analogue switch-off in 2008-12."

Although UTV shares some of the characteristics of the other free-to-air companies, its lower rating is likely to lessen the impact on its shares. Even so, UTV's shares also fell last week.

Using a sum-of-the-parts valuation, Numis values SMG at 36p a share. "We view SMG as a high risk investment due to its highly geared balance sheet, which necessitates the disposal of Virgin Radio to bring debt down to a manageable level," it says.

One source familiar with SMG admitted that the note had caused a shock to the shares, but he said the underlying value of SMG was being held back by uncertainty over the future of Virgin Radio.

There were rumours last week that BSkyB was circling the radio business and may be prepared to pay 75m for it, though this was before the recent slump in the shares. If it were to swoop on the station which SMG had hoped to float at about this time, it could prompt another spat with Virgin brand owner Sir Richard Branson who is also believed to be eyeing the business. UTV is also among those interested in acquiring Virgin Radio.

SMG declined to comment, except to say that it was continuing to progress along the lines outlined in its strategy.