Southern FM yesterday became part of the biggest radio group in the country when its owner, Capital Radio, completed a merger with one of its biggest rivals.

The landmark tie-up between Capital and Classic FM owner GWR was overshadowed by figures showing a sharp drop in trading at the two businesses.

GCap Media, as the combined company will be known, announced a fall of 17 per cent in revenues for April and warned advertising would be weak for May and June.

The warning, which resulted in GCap shares plunging by eight per cent in the first hour of trading, came as Capital said underlying profits had fallen to £10.8 million in the six months to March 31, from £12.1 million a year earlier.

Half-year revenues were slightly lower at £58.5 million with the group's biggest advertising market of retail - accounting for 17 per cent of business - showing a nine per cent year-on-year fall in sales.

As well as its main London radio station, Capital broadcasts Xfm, the Century FM network and Choice FM and Brighton-based Southern, whose DJs include Danny Pike and Nicky Keig Shevlin. It said it had agreed to sell its Nottingham-based station, 106 Century FM, to Chrysalis Radio Holdings for £29.5 million, a deal required for the GWR tie-up to be granted regulatory clearance.

Capital and GWR struck the merger as part of efforts to develop a stronger position in digital radio and compete more effectively with the BBC.

The deal creates a group with 56 analogue and almost 100 digital stations. GWR owns Classic FM and stations including Trent FM and Essex FM. Capital shareholders will own 52 per cent of the company.

GCap said revenues at Capital Radio were down 21 per cent and those at GWR by 15 per cent.

It blamed weak consumer confidence and low spending by the "traditional top ten radio advertisers' for affecting demand and pointed to one-off factors such as Easter and the General Election.

The company said: "The GCap Media board is taking a cautious view on overall market conditions and currently expects the principal factors that impacted April to continue in May and June."

Charles Stanley Stockbrokers in Lewes said the magnitude of the impact of weak consumer spending on advertising from the retail sector had come as a surprise. Recent failures of radio advertisers Rover, Allders and Coldseal had not helped matters and the outlook for the first quarter was bleak.

The Argus columnist and stock-broker at Charles Stanley, Mark Withers said: "More mergers are due with Emap owning 27.8 per cent of Scottish Radio and Granada owning 16.87 per cent of SMG. There are a lot of cross shareholdings in the industry and it is a sector where mergers or takeovers will produce big cost savings.".

Tuesday May 10 2005