The battle for control of Forte has generated some important developments in takeover bid tactics. Granada introduced a new twist to the special dividend and made a controversial profit improvement plan while Forte announced a huge share buyback and agreed major disposals which would have taken place had the bid failed.
The battle for control of Forte was fairly acrimonious even by the normal standards of contested bids. Amidst the mud slinging there have been some important developments in bid tactics. Granada introduced a new twist to the special dividend and made a controversial profit improvement plan. Forte announced a huge share buyback and agreed major disposals which would have taken place had the bid failed.
Special dividend
In its final offer, Granada announced its intention to procure the payment of a special dividend of 47 pence (net) per share by Forte to its shareholders if the bid was successful.
Special dividends have become a fairly common feature of public bids in recent years. Many regional electricity companies used them as part of their defence .The main benefit is derived from the tax treatment of dividends paid to institutional investors. Institutional investors can usually reclaim the tax credit on a special dividend from the Revenue thereby boosting the value, in their hands, of the bid. But as the ACT paid by the company on the dividend (which is equal to the tax credit) will be offset against mainstream corporation tax, the Revenue effectively ends up with less tax than it would otherwise receive in the absence of a special dividend (assuming that the paying company does not have a surplus ACT problem).
There are two novel aspects to the special dividend announced by Granada. It is the first time that a hostile bidder has included a special dividend to be paid by the target company as part of the bid finance and (more significantly) it is the first time that a bidder has made a special dividend "optional".
Granada stated its intention to procure payment of the dividend as soon as practicable after its increased offer became unconditional to Forte shareholders on the register on that date. This would involve the co-operation of Forte's board who would have to declare the dividend, although by that time Granada would speak for the vast majority of Forte's shares.
Shareholders who did not wish to receive a dividend could instead elect to receive an immediate cash payment equal to the net amount of the dividend. This would be more attractive to private investors who cannot reclaim the tax credit on dividends. Unlike the special dividend, the extra payment will be assessed for capital gains tax and individuals will be able to use their annual exemptions.
Profit improvement plan
Granada included a profit improvement plan in a circular sent to Forte shareholders on 14th December claiming that it could improve Forte's profits by over £100 million in the first full financial year following the acquisition (excluding reorganisation costs) - mostly through cost savings. The circular did not contain a detailed breakdown of how the savings would be made so Forte complained to the Panel.
Although the Takeover Code contains detailed provisions relating to profit forecasts made during a bid by either party relating to themselves (Rule 28), it does not refer specifically to information that quantifies the benefits of a proposed merger. There are however general statements relating to the provision of information to shareholders (General Principles 4 and 5 and Rule 19.1).
The Panel ruled that Granada had satisfied these more general information requirements. It observed in particular that Granada had set out the bases of its analysis and its financial advisers and accountants had confirmed their belief that Granada's analysis had been carried out with due care and consideration.
The Panel has nevertheless asked the Executive to consider whether changes to the Code are necessary to deal specifically with statements about the expected benefits of a proposed merger where the benefits are quantifiable.
Share buyback
A major plank of Forte's defence was the announcement of its intention to buy back 20 per cent. of its shares at a cost of approximately £800 million if the bid was unsuccessful. This would have helped to support Forte's share price if the bid had failed as well as being a flexible way to return surplus cash from the disposal programme to shareholders.
Where a company proposes to repurchase 15 per cent. or more of its shares, the buyback must be either by tender or partial offer (Paragraph 15.7 of the Yellow Book). Forte said it would structure its buyback as a tender offer. The novel feature of the buyback (apart from its size) was that Forte stated its intention to effect the buyback at the then prevailing market price, subject to a minimum and maximum price per share (of 330p and 400p respectively).
The Yellow Book requires tender offers to be made at a stated maximum price or at a fixed price. Unlike smaller share buybacks, there is no requirement that the price paid must not be more than 5 per cent. above the average of the market values of the shares for the 10 business days before the purchase is made .By adding a minimum price (irrespective of the prevailing market price), Forte gave shareholders a "floor" at which they could theoretically sell a significant proportion of their shares if the bid failed.
But share buybacks are also governed by the guidelines of the Association of British Insurers. These request companies to undertake that the authority to purchase will only be exercised if to do so would result in an increase in earnings per share and is in the best interests of shareholders generally. Forte's circular contained wording reflecting these guidelines.
Forte's directors believed that there was a realistic possibility (based on its own financial analysis) that the buyback could enhance earnings per share at the relevant time. However, in Granada's view, even the best case scenario would not produce the required earnings enhancement.
Disposals
The other major feature of the Forte defence was its disposal programme.
A target company cannot make disposals of a material amount during the course of a bid without shareholder consent unless the disposals are made in pursuance of a contract entered into before the directors were aware that a bid was imminent
Forte's sale of Lillywhites, the sports retailer, Griersons, the wine and spirits wholesaler and US Travelodge and other assets were either not material or were completed pursuant to a pre-existing contract.
The proposed £1 billion sale of Forte's roadside restaurants to Whitbread was in any event a "Super Class 1" transaction requiring shareholder approval and Forte decided to seek shareholder approval for the sale of White Hart Hotels which was agreed towards the end of the bid.
The most interesting feature of the disposal programme was some of the terms of the sale to Whitbread:
Both parties agreed to pay the other's costs up to £1 million if the sale was not approved by their respective shareholders.
This type of clause is relatively uncommon and is designed to enable the "no fault" party to recover its transaction costs.
If the deal had gone ahead and the competition authorities had required Whitbread to sell any of the assets acquired, Forte agreed to pay 50 per cent. of the difference of any shortfall between the ultimate disposal price and the price paid by Whitbread for those assets.
This type of clause is rare. Because Forte wanted to sign the contract as quickly as possible, it was not possible to obtain a decision from the competition authorities in advance. In these circumstances, it seemed reasonable that Forte should share losses on any subsequent forced disposals.
If prior to 31st December, 1996, Forte were to sell the whole or any part of the roadside business to any party other than Whitbread, Forte agreed to pay Whitbread 50 per cent. of the amount by which the consideration receivable by Forte exceeds the consideration attributable to those assets pursuant to the agreement.
This is the most unusual clause, particularly as it would relate equally to any disposals "by Granada" of Forte's roadside business if the bid were successful. (Granada had publicly undertaken to make such disposals.)
This is not exactly a poison pill but may give Granada a little indigestion.
Forte's directors presumably concluded that the clause was reasonable and in the best interests of the company taken in the context of the whole transaction.
Forte plc :
Trust House Forte (THF) evolved from a merger of Forte Holding Ltd (Forte) with Trust Houses plc in 1970 (Stewart, 1991). Over the years, THF expanded mainly through the acquisitions of existing hotels and remained the leading hotel group in the UK. Major acquisitions in the 1970s included the US-based Travelodge properties and a group of 35 hotels owned by J. Lyons (CHK, 1978). In the 1980s, THF expanded through the acquisitions of Anchor Hotels from Imperial Hotels and Catering, Kennedy Brookes' groups of hotels and Crest Hotels from Bass (HCIUK, 1987; HCIUK, 1991). After the acquisition of Crest Hotels, THF further consolidated their position as the largest operator of hotel with 300 hotels in the UK (HCIUK, 1990). During the early 1990s, several events took place within the company, which led to some restructuring such as reducing the corporate employee headcount from 3000 to 1000 and selling off the catering arm Gardner Merchant (Slattery and Johnson, 1993; Waller, 1992). In 1991, THF changed its name to Forte Group plc after a market research, which revealed that the name 'Forte' has a wider appeal (CHK, 1996; Harrison and Johnson, 1992). In the same year, Forte expanded through a joint-venture to manage 18 of AGIP's hotel in Italy (Skapinker, 1994; Slattery and Johnson, 1993) and closed another deal with Aer Lingus to build a number of Forte Travelodge in the Republic of Ireland (Harrison and Johnson, 1992). The founder, Lord Forte retired as chairman, and his son Rocco Forte took over in 1992 (CHK, 1996). In 1994, Forte acquired the Le Meridien hotel group from Air France, which expanded Forte's portfolio in the international market. After the acquisition of Le Meridien, Forte reshuffled its hotel portfolio and placed 80 hotels for sale or for a joint venture partner (Skapinker, 1994). However, Forte's profit had been stagnant or declining since the end of the 1990s (KN, 1995), and the group was acquired by Granada Group plc (Granada) in a hostile takeover bid. After acquiring Forte Group, between 1996 and 2000, Granada sold off the Welcome Break chain to Investcorp, the White Hart chain to Regal Hotel Group and the 50% of shares back to Italian Oil and Gas Company ENI (Blackwell, 1997; Price, 1997). In 2000, Granada and Compass Group plc (Compass) merged and formed the Granada Compass plc with an agreement between the two companies to de-merge the hospitality and media business after the merger (CG, 2000b). This agreement in part led to the sale of the hotel sector in order to enhance shareholder value (CG, 2000a). Travelodge which was the last of Forte's hotel chains was disposed off in 2003 when Compass Group decided to focus on its core businesses: contract foodservice, vending and on selected foodservice concessions (CG, 2002).
Granada plc :
1. Granada is a media company involved in commercial broadcasting, programme making and the supply of services to the television and film industries. In the year to 30 September 2002 group turnover was £1,427 million, the loss before tax was £378 million and shareholders' funds at the year end were £1,641 million. The average number of employees employed by the Granada group in the year to 30 September 2002 was 4,696 (2001: 30,797 including 25,693 in the hospitality business prior to its de-merger in February 2001). The loss for the year to 30 September 2002 was arrived at after taking account of losses of £214 million on discontinued operations. In the six months to 31 March 2003 the group trading position improved with an unaudited pre-tax loss of £13 million (2002: pre-tax loss of £169 million). The shares of Granada are listed on the London Stock Exchange and at 30 June 2003 the group's equity market capitalization was £2.5 billion. At 27 November 2002 Granada had been notified of six holdings of 3 per cent or more in its ordinary share capital which together amounted to 21.34 per cent.
2. The predecessor holding company to Granada was Granada Group plc (Granada Group), which was incorporated in 1934 to acquire the theatre and cinema operations of Bernstein Theatres, a company owned by Sidney Bernstein (later Lord Bernstein) and his brother Cecil. Granada Group obtained a listing on the London Stock Exchange in the following year. In 1954 Granada Group was awarded one of the UK's first commercial television programme contracts for weekday broadcasts in the North of England. In 1961 Granada Group diversified into television rental and in 1965 it opened its first motorway service area. Many of the cinemas were converted to bingo halls in the 1960s and 1970s and that business was sold in 1991. In the 1990s Granada Group made a number of strategic acquisitions. In the non-broadcasting area it acquired Sutcliffe (contract catering) and Spring Grove (textile rental) in 1993, Pavilion Leisure (motorway catering), Direct Vision Rentals in 1994 and Forte (hotels and catering) in 1996 for £4 billion. In broadcasting it acquired LWT in 1994 and Yorkshire TV and Tyne-Tees TV in 1997.
3. A major reorganization of Granada Group involving a series of transactions took place in 2000. In May 2000 Granada Group and Compass Group Holdings PLC (Compass Group) entered into a merger agreement which set out the basis of the proposed merger between the two groups and the subsequent demerger of the enlarged hospitality business of the two groups. The merger became effective on 27 July 2000 at which stage all the existing share capital of Granada Group was cancelled and shareholders in Granada Group received shares in a newly established company, Granada Compass plc (Granda Compass), which itself obtained a Stock Exchange listing. In June 2000, Granada Group merged its television and video consumer rental business with the equivalent business of Radio Rentals to form Box Clever, a 50:50 joint venture between Granada Group and Nomura International plc,1 in a deal which realized £511 million in cash for the group. On 17 July 2000, 20 per cent of the share capital of Granada Media plc (Granada Media), which was the holding company for most of Granada Group's media interests, was sold to investors for £1,545 million and a listing was obtained for the shares on the London Stock Exchange. Following the merger of Granada Group and Compass Group, Granada Media was an 80 per cent owned subsidiary of Granada Compass. In February 2001 Granada Compass demerged its hospitality business into Compass Group plc, a newly listed company, and changed its name to Granada plc. Shareholders in Granada received shares in Compass Group plc at the time of the de-merger. On the same date the minority shares in Granada Media were cancelled, with shareholders in the company receiving shares in Granada.
4. Following a report by the CC in 2000,2 Granada Compass acquired in October 2000 Anglia TV, HTV and 80 per cent of Meridian TV from UNM. The HTV licence was subsequently sold in January 2001 to Carlton, part of the consideration consisting of Carlton's 20 per cent minority shareholding in Meridian TV, but Granada retained HTV's production interests. In 2001 Granada acquired Border TV
5. In March 2002 ONdigital, the digital terrestrial joint venture with Carlton which had been estab-lished in 1997 and began broadcasting in 1998, was placed in administration and is now in liquidation.
6. In the 2002 accounts the directors of Granada stated that following the demerger of the hospitality business to Compass Group plc, the group had only one continuing business segment which included interests in broadcasting, production, digital television and other media activities. Granada now largely consists of two integrated divisions: Granada Broadcasting Enterprises which includes Granada's seven regional ITV licences and Granada's airtime sales operation; and Granada Content, which covers all Granada's production companies. It also owns Granada Business Technology Limited, a business to business operation delivering interactive video solutions to the UK hotel sector.
Granada Broadcasting Enterprises
7. Granada Broadcasting Enterprises comprises the following main activities:
(a) seven of the 15 regional ITV licences in the UK (see paragraph 4);
(b) airtime sales for the seven Granada regional licensees and for two other ITV licensees Channel TV and Ulster TV; and
(c) provision of marketing opportunities through programme sponsorship, online activity and merchandising.
Granada Content
8. Granada Content comprises the following main activities:
(a) UK programme production and distribution;
(b) international programme production and distribution in the USA, Australia and Germany; and
(c) Granada Learning provides educational resources and services to the UK educational sector.
