Granada plc which was earlier known as the Granada group plc is a former British media and was associated with the catering business. Granada TV ltd has come out under the name of the iTV which is the result of the Carlton communication plc. It was once listed in the FTSE100 index. Presently, Granada group holds the business such as-
Media business
Granada TV rental
Catering business
Merger with Carlton
Forte group plc was a famous for the British hotel and restaurant company which was once listed in the London Stock Exchange and part of the FTSE100 index which followed a acquisition by the Granada.
Charles Forte who started a "milk bar'' in London, 1935 which had a name as Strand milk bar ltd expanded into a catering and hotel business .Forte became Forte holdings after the second world war and bought the Café Royal in 1954 and started the first motorway service station in Newport Pagnell in 1959.THF came into action after merger of Forte in 1970 with Trust house Forte. The brand name of Forte was known as-
Forte Heritage
Forte Post house
Forte Crest
Forte Grand
Background of the Analysis
Companies have a tendency to expand and have an edge in the market through the mechanism of the mergers and acquisition (M & A). Merger and Acquisition of Granada plc has been an important case for the merger and acquisition as it has come into the limelight for a series of M & A. Granada's takeover of Forte plc has been signified as the hostile takeover for a number of good reasons where the Board of takeover company Forte plc has argued against it and undergone various debates in that situation. There was least possible chance that the both companies will be able to work together and there is a higher risk and possibility of lack of information in that way.
The bid started itself on 22 November, 1995, considered as the most significant bid of the 1990s under the presence of CEO of Granada plc Gerry Robinson and the CEO of Forte Sir Rocco Forte as a part of dynastic business built up by his father Sir Charles Forte.
Granada group plc has started as company with a capitalization of £240 million, which will be valued over £4 billion at the present position and known to be the UKs largest growing and most profitable company .Granada has been impressive in terms of crucial financial indicators such as year on year turnover, operating profit, earnings per share and dividend per share are 10 percent, 30 percent, 22 percent and 17.5 percent respectively. The company has three divisions, leisure and service, Television and rental and computer services. When Gerry Robinson has taken over as the CEO, Granada has become more efficient in terms of operating profit, ROCE, EPS and share price. The share price index of Granada has gone up by 150 percent in FTA-All share index.
On the other hand Forte has the business such as hotel and restaurant with 940 hotels and restaurants which range from luxury hotels to budget hotel operations through motorway service area to road side restaurants. There are various famous brands incorporated with Forte such as The Meridian, George Hotel in Paris and Trophy hotel. But Forte has underperformed in the market from 1991 and anaemic on growth and lower in capital return. Sir Rocco has been more concerned with lineage rather than management experiment and overlooked the Cadbury committee's recommendation of governance.
Gerry Robinson has been a famous figure for the performance of Granada in case of Grand metropolitan Hotels and Compass. During his day in Compass, the margins are up by 10 percent and in some instances with Granada he was able to double the margins.
Q(1)making use of table 1, do you believe that Granada's bid was a "takeover waiting to happen"?
Ans1.
Trend analysis from the table no-1
From the table-1, it is seen that , from 1991-1995 the sales of the Granada is on an inclining trend with a high on the pre -tax profit and the most important indicator is the earning per share with a high on the dividend payment. It could also be seen as high on the interest cover up.
But if we go across Forte, Their sales are going down from 1991-1995 and pre tax profits always follows a fluctuating movement so the EPS also and there is almost stagnant dividend policy. The interest cover is also low in this period.
We can discuss the motivation for Granada's bid from different angles:
Personality cult attached to Gerry Robinson, the new person at the helm of affairs at Granada:-This gentleman had developed a reputation as a sort of specialist for contract catering industry. He had very successful tenure at Grand Metropolitan Hotels and Compass before joining Granada. He enhanced margins at Compass up to 10%, earning praise from within the industry. In Granada too, he doubled the margins at Sutcliffe following takeover by Granada. Thus it was only natural that Gerry Robinson was showing lots of interest in Forte where he believed that he can deliver better than the existing management. He seemed to be surprised and unimpressed by rebuff of Forte for Gardener Merchant, he somewhat believed that it is only a matter of time before he can revamp whole Forte itself.
Mismanagement on the part of top brass at Forte: There seemed to be some justification on the part of critics that Sir Rocco, CEO and later Chairman, was unable to take professional decisions like trophy hotels such as George V in Paris, expansion in USA etc. Market seemed to be unimpressed by his talent in driving up fast both revenue and profits. Hence it is no surprise that market cap of Forte just before takeover bid was 2.6 billion pounds only against 1996 sales of 1.94 billion pounds. That meant it was less those next two years sales. This low market cap demonstrated capital market's lack of enthusiasm in existing management of Forte.
Significant scope of industry upturns in near future: As per industry research, all sort of hotels be it five star category or budget hotel category would be beneficiary of industry recovery after several years of recession. The budget hotel business in UK was mostly controlled by two players, Forte being one of them. The budget hotel category represented only 3% to UK market compared to 15% in France and 12% in USA. Thus this budget hotel category represented significant growth opportunity for Granada through acquisition of Forte.
Significant benefits from synergy and disposal of little cash generating high asset value hotels of Forte: The disposal of high asset value but little cash generating hotels would serve the purpose of debt repayment for Granada after takeover of Forte. We have seen that latest interest coverage ratio for Forte is just 2 times compared to 10 times for Granada. Hence Forte was really vulnerable to drop in sales for whatsoever reasons leading to dishonour debt servicing obligations. It made immense sense to dispose off such "trophy" assets. The unsuccessful attempts to expand beyond UK have put pressure on cash generating assets of Forte, which made little sense at that point of time. Granada management believed that due to their superior operating and other financial parameters, they are better suited compared to Forte to undertake expansion outside UK. The management of Granada saw significant value unlocking in catering business after this takeover.
Ans2.
There are indications those earnings multiple like P/E cannot be applied to Forte. P/E ratio can be applied to a company who's financial and industry dynamics are fairly uniform. There was huge difference in implied PE of 27 and ongoing industry PE of 17. Moreover there was confusion regarding actual number of outstanding shares for Forte. This means that because of dilution of EPS, PE may be still higher. This huge difference in implied PE and industry PE clearly means that PE is not the right way to value Forte. Moreover many assets of Forte were actually bleeding putting pressure on cash generating assets. Hence revenue and earnings potential of Forte may be quite different compared to what has been achieved by Forte under existing management. Thus blindly applying an industry multiple of say 17 to existing earnings would clearly undervalue Forte. Thus applying PE in this case would be more subjective than objective function. In the case of Forte, both sales and EPS every year have been highly fluctuating.
Dividend discount model are applied to companies where earnings can be predicted quite accurately for next year. Moreover the industry in general and the company in particular is supposed to enter mature phase. Lack of certainty in next year's earnings and dividend payout make applying dividend discount model highly unsuitable in this case. By applying dividend discount model, value was coming at roughly 1 billion pound, way below market cap of 2.6 billion pounds.
Net asset valuation is coming quite closer to existing market cap. This means that market is not willing to offer substantially higher value compared to existing net assets. (2.6 billion pounds compared to 2.4 billion pound). Market was not attaching any premium to management quality or earnings potential from turnout. For an ordinary investor from outside, this market cap seemed to be fair. Extra earnings potential can be found from synergy, cost cutting or disposal of "trophy" assets and concentrating more on existing profitable business. These factors are mostly outside the purview of passive investors.
To put a value on Forte, we should put some premium over its net assets. This premium includes 700 million pound for Road Side (at book value), thus total premium would be 1.918 billion pound plus net assets value of 2.462 billion pound.
Q (3) To what extent do you consider that Forte's defence was credible?
Ans: Many of the actions undertaken by Forte management seemed to be desperate which they should have done long ago like disposal of trophy assets and consolidating more on cash generating assets. Savoy became more of a personal agenda for Forte's CEO than a professional one. His desperate efforts to dispose off several assets no doubt would make interest and debt burdens less. But how he is going to enhance sales from better management and focus was not clear.
In normal course of business, if a company keeps generating significant free cash flow in a matured and dominated kind of business, the management can opt for share buyback which is not earning dilutive and it enhances outstanding share value. Moreover this can be resorted by the management if there is significant fall in the share price due to macroeconomic environment like recent subprime crisis in USA and not for company's own problems, then management can resort to share buyback at such low prices which again enhances outstanding share value and demonstrates management commitment to the shareholders. Both these situations were absent in the case of Forte. Selling cash generating assets to fund share buyback is a great mistake especially when the company keeps many loss making entities. Though temporarily share price can go up after 20% of share buyback, this is harmful in the long term.
Though Granada was incurring higher debt equity ratio than that of Forte, it was more of reflection on Granada's sound financials rather than weakness. Granada had very healthy operating cash flow and general economic outlook for the industry was improving. Hence it faced lesser difficulty compared Forte in debt servicing. Moreover by successfully integrating Forte's assets, it seemed possible for Granada to service debt burden without much bother. Thus Forte's criticism of excessive debt on the books of Granada seemed unfounded.
Moreover revaluing the luxury hotels brands in the midst of ongoing take- over battle is hardly value enhancing exercise for existing shareholders of Forte. Shareholder value must come from higher sales and higher profits in the income statement, then flowing to balance sheet net-worth. Just revaluing upwards hotels business and consequently enhancing net-worth is not at all share holder value enhancing exercise. If the value is actually higher, the moot question is why it is not being generating higher revenue. That means problem is with the existing promoters of Forte, not with the hotels itself.
Q (4) Why do you think no White Knight emerged?
Ans: The chance of forte management in repulsing the rival bid became very slim .White Knight emerges when there is slender margin between the two parties and White Knight throws his weight behind the existing management. With the backing of White Knight, the target company can foil the hostile takeover.
Mercury Asset Management held 15% equity of Forte. The concerned fund manager backed Granada management as she believed that management at Forte is not doing enough for its shareholders. Private investors held 15% equity in Forte. They backed Granada. Granada already owned 10% equity in Forte. Institutional shareholders owned 11% equity in Forte. These institutional shareholders backed Granada. Thus Granada was able to garner more than 50% equity shareholders of Forte in its favour. Thus it was only a matter of time for Granada to take over Forte. Thus there was nothing left for White Knight to back the existing management of Forte as it did not stand a chance of thwarting the rival bid.
Q5-Up to date Information after the merger
Forte demerger plan puts paid to Granada shareholder appeal
After the merger the Forte group tried to maintain a different strategy in a more defensive way and at the same time expressed different interests. The 3.3bn was exactly a hostile bid for Granada with Forte and Granada had to fight for the survival of its bid. This bid was not viable to last long and Forte has started with the demerger proposal which created sensation in the corporate world. The Granada's Garry Robinson would be the person with high stress .There are major paradigm shift from the restaurant interests of Forte (Happy eaters, little chefs and like) with or without Savoy, Sir Rocco will be providing a new shareholders value.
This move has made the new restaurant business attractive for both sides of the Atlantic. This kind of initiative is helpful to ramp the price of Fortes eateries and another move is that there is a sale option for the savoy hotels to show some fundamental bid.
However, the Sir Rocco has a tendency to sale as he sold Harvester to Bass for 165m while the best market price was 120m.However Granada thinks that the retention of Lillywhite is an sentimental one and hence Sir Rocco able to find a buyer for the twice of the book value. The complex part is the Meridian contracts for Forte but for Granada feels no problem.
It was due to Sir Rocco's craze for the corporate fashion where the deal was not taken place at the discounted phase and there was a higher demand for the demerger.
As the company was widely diversified it was a higher possibility for earning growth. Demerger after a hostile acquisition has become a common phenomenon, for many analysts, Granada is like in a position to climb a mountain. As it was rightly described by the analysts with Edinburgh based Sutherland and amp, Partners Granada has a lack experience in hotel management. So it should follow the Fortes strategy line to either resort on short termism which is not suitable for a hotel business and in that way increased the bid in excess of 375p and it's a case of material dilution and damage the Granada's plc.
Another important part of the aspects of Granada and Carlton's was an exposure to the iTV exposure geographically where Granada could face a diminution of television profit by 12m. At that point the status of the Sir Rocco will go for the growth with demerger.
Source-Forte demerger plan puts paid to Granada shareholder appealhttp://www.marketingweek.co.uk/home/forte-demerger-plan-puts-paid-to-granada-shareholder-appeal/2016125.article retrieved on 20th December, 2010 at 11-00 pm
Forte regains use of family name five years after Granada defeat
After a five year take over the Forte has regained the business into the family's hand. The name was returned to Lord Forte, the 92-year-old founder of the Forte Empire and his son Sir Rocco at a ceremony at Lord Forte's house in Belgravia, central London.
Finally, it was handed over by the Compass, the catering company which is responsible for sale of all the hotels which is a part of the Granada's £3.8bn bid for Forte in 1996 and Compass took the hotel which is a part of the Granada group.
Sir Rocco, 56, who now runs RF Hotels, said: "This gesture means a lot to my family as people will not be able to use our name to promote businesses in which we are not involved. It draws a line in an elegant way under the events of the takeover. I think my father was particularly pleased with it." And at the same time Lord Forte expressed this deal as a matter of goodwill. Sir Rocco has defended it that the takeover bid the less business than it was used to buy it. In the same way Sir Rocco is of the opinion that it will try to buy more Forte Hotels they sold and in negotiation with Nomura who bought the Meridian Chain.
Source-Nigel Cope, Forte regains use of family name five years after Granada defeat retrieved from
http://www.independent.co.uk/news/business/news/forte-regains-use-of-family-name-five-years-after-granada-defeat-665905.html on 20th of December, 2010 at 10-00pm
