Exits – Ginger is spice of life for Apax

Scottish Media Group, owner of the Grampian and Scottish Television ITV franchises and the Herald newspaper, has announced its GBP225 million ($371 million) acquisition of Ginger Media Group, the television and radio group owned by high-profile UK broadcasting personality Chris Evans. The transaction, which at press time is still subject to approval both from shareholders (due on 31 January) and the UK Radio Authority, is set to deliver handsome returns both to Chris Evans, who will pocket some GBP75 million ($124 million) in cash and shares over a three-year period, and to Apax, the media group’s private equity backer.

The deal will be partly funded by a GBP58 million ($95 million) rights issue by Scottish Media Group, which will pay GBP110 million ($180 million) in cash, GBP40 million ($66 million) in equity and assume GBP75 million ($124 million) of Ginger’s debt.

Ginger Media Group came into being in late 1997, following the sale of Virgin Radio to Capital Radio. Apax’s involvement with the group began four years earlier, when it invested GBP4.5 million ($7.4 million) in Virgin Radio’s start-up. Four years later, the private equity group sold its 25 per cent stake back to the radio company, achieving a net 3.5 multiple of its original investment.

The 1997 Capital Radio/Virgin deal was subject to review by the Mergers and Monopolies Commission. While the review was ongoing, Evans approached Apax with a proposal to buy the Virgin Radio business – a transaction which would have to complete before the MMC announced the results of its deliberations because, had they been favourable to the Capital/Virgin deal, the sale would have gone through. Apax therefore had a window of approximately four weeks to match Capital’s offer and do the deal.

Apax director Paul Fitzsimons, who worked on the Ginger/Virgin deal alongside Barbara Manfrey and has served with her on Ginger’s board since the investment, explains that Apax’s long-standing relationship with Virgin Radio’s management made completion within this tight timeframe a feasible proposition. The eventual structure arrived at involved the merger of Evans’ TV company Ginger Productions with Virgin Radio, acquired for a consideration of GBP80 million ($131 million). Apax invested GBP22 million ($36 million) for an unratcheted 20 per cent holding, supported by a GBP40 million ($66 million) senior debt package from Paribas. Evans owned a 50 per cent stake in Ginger Media Group with a further ten per cent in the hands of management and staff, while Virgin’s Richard Branson retained a 20 per cent holding in the new entity.

Apax’s investment thesis, as summarised by Fitzsimons, was that Evans would increase Virgin Radio’s listenership and, in parallel, that the TV group would expand its activities and boost revenues. Both of these objectives were attained, with Virgin Radio’s audience increasing by around one third, and group earnings rising from GBP10.5 million ($17 million) to GBP15 million ($25 million) during the life of the investment.

The rationale for a sale to Scottish Media Group, says Fitzsimons, is that Evans and the management team wanted to grow the business further, something which they believed could better be achieved as part of a larger media group than as a standalone entity. Goldman Sachs, whom Apax appointed as adviser, concurred that for Ginger Media to develop further the company would fare best as part of a broader media group. Accordingly, during the closing months of 1999, Ginger Media Group’s owners initiated a limited auction.

On the sale to Scottish Media Group, Apax will receive proceeds of slightly more than GBP50 million ($82 million) and will thus have more than doubled its money in just over two years. “For a large LBO, this is a nice return,” was Fitzsimons’ restrained comment on the investment’s performance.

Scottish Media Group, which describes the deal as a transforming acquisition at an excellent price’, will strengthen its national presence and growth prospects through the purchase of Ginger.

However, Granada, which owns 18 per cent of Scottish Media Group, was less than overjoyed with the news of the proposed acquisition, which Granada chairman Gerry Robinson reportedly described as a bad value deal’. Granada’s misgivings seem to be twofold, relating in the first instance to Evans’ reputation as a volatile and impulsive character and in the second to the block that the deal would put on any attempt by Granada to acquire SMG outright, thanks to TV competition regulations. The first objection would appear to be somewhat overcautious. Evans, although by no means everyone’s cup of tea behind a microphone or on screen, has surely proved himself as a credible businessman through the creation and development of his media business. Furthermore, by incorporating payment of shares over a three-year period, the structure of the SMG/Ginger deal has been designed to align Evans’ interests with those of the enlarged group.

Scottish Media Group’s other major shareholder, Flextech, which owns 18.6 per cent of the media business, has issued irrevocable undertakings to support the Ginger acquisition and related rights issue. Meanwhile, broader institutional sentiment towards the transaction has been generally positive, with SMG shares increasing by 45p to GBP11 on announcement of the proposed acquisition.