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European Management Journal Vol. 16, No. 2, pp. 230–241, 1998 1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain S0263-2373(97)00091-1 0263-2373/98 $19.00 + 0.00
The Hostile Takeover Process: A Case Study of Granada Versus Forte BILL NEALE, University of Bradford Management Centre TONY MILSOM, University of Bradford Management Centre CARL HILLS, University of Bradford Management Centre JANE SHARPLES, University of Bradford Management Centre
This paper presents an analysis, in case-study form, of the hostile bid in 1995 by Granada Group plc, the leisure services conglomerate, for Forte plc, the hotel and restaurant operator. Completed in early 1996, this episode provides a rich illustration of the key elements of the take-over process - motivation and strategy of the bidder, valuation of the target and defence tactics employed by the defending management. In addition, it highlights the role of the central personalities in the process. 1998 Elsevier Science Ltd. All rights reserved
Introduction The takeover process continues to fascinate academics. Issues which have attracted particular attention are the size of take-over premiums, the integration process and the post-acquisition performance of expanded groups. In the last regard, there continues to be a stream of research reports which cast doubt on the efficiency of growth by acquisition as a means of enhancing shareholder victims of their own corporate machismo value. The suspicion remains that some companies become ensnared once they launch a bid, determined to win the "game" at whatever price. Yet there are companies which seem to possess the skills required for pre-acquisition appraisal, bidding and post-acquisition integration. In their respective heydays, Hanson and BTR were renowned takeover exponents, rarely paying excessive amounts and 230
being prepared to walk away when it seemed that higher bidding would destroy value. More recently, the Granada Group has clawed its way back from the financial abyss which it confronted in 1991, via a series of highly successful acquisitions such as Sutcliffe Catering, London Weekend Television and most significantly (in relation to its own size) the hotel and leisure company, Forte plc, concluded in early 1996. Meanwhile, this article presents a case study examination of the Forte take-over, focusing on issues of valuation, bidding and defence tactics. Although not intended to be a "tool-kit" for takeover success, but rather an analysis of the takeover process itself, it does offer important insights into the strategic thinking of the bidder and some hints as to the drawbacks of this venture. We begin by presenting the background to the bid with a brief survey of the recent performance of the two protagonists, before discussing the apparent motivation for the bid. We then examine the valuation of Forte from a number of perspectives and then outline the defence tactics adopted by Forte’s management, before providing a concluding section.
Background to the Bid Granada Group plc’s bid for Forte plc, launched on 22nd November 1995, began one of the most colourful, controversial and most fiercely fought takeover European Management Journal Vol 16 No 2 April 1998
THE HOSTILE TAKEOVER PROCESS: A CASE STUDY OF GRANADA VERSUS FORTE
battles in recent years. At stake in this hostile bid were household names ranging from London’s exclusive Grosvenor House Hotel to the Little Chef chain of roadside restaurants. Adding to the drama were the personalities at the centre of the battle: Gerry Robinson, Chief Executive Officer of Granada, the ninth of ten children of a carpenter, with a track record of the successful Granada turnaround behind him and an enthusiastic City following, versus Sir Rocco Forte, Chairman and CEO of Forte, facing loss of control of a dynastic business painstakingly built up over half a century by his father, Sir Charles (later Lord) Forte.
Granada Group Plc In his final report for the year ended September 1995, the outgoing chairman, Alex Bernstein, recorded the growth of Granada from a company capitalised at £240 million, on his appointment as chairman, to one now valued at over £4 billion. Over these years, it had "grown to be one of the UK’s largest and most profitable companies, with businesses which are market leaders in their industries", committed "to provide high quality at value for money prices". Bernstein was able to bow out by reporting year-on-year increases in turnover, operating profit, earnings per share (fully diluted) and dividend per share of 10, 30, 22 and 17.5% respectively. Its three divisions, Leisure and Services (comprising budget hotels, theme parks, travel operations, motorway services and contract catering), Television (which included an 11% stake in BSkyB, valued at around £650m), and Rental and Computer Services were well balanced in terms of their respective contributions to operating profit (32, 36 and 32%) although less so by contribution to turnover (47, 23.5 and 29.5% respectively). The longestablished TV rental business, the core of the "old" Granada, had become a cash cow as relative tastes for TV acquisition and rental had altered over the years. Overall, Granada had become a strong cash generator, £463 million flowing in from operating activities, although higher capital expenditure, higher dividends and acquisitions had resulted in an increase in net debt by £50m and a small increase in gearing (debt/equity) from 58 to 59%. Emphasis on cash generation had been a cornerstone of Granada’s recent financial policy as it recovered from its problems in the early 1990s. In 1991, before the appointment of Gerry Robinson as CEO, Granada had been in some distress, as shown in Table 1 (below), with operating profitability, ROCE and EPS all declining and a depressed share price. In the four years since Robinson’s appointment, operating profits had almost quadrupled and Granada shares had outperformed the FTA-All Share Index by over 150%. In addition, the group successfully absorbed two major acquisitions in Sutcliffe, the contract caterer, and London Weekend Television. At the close of business on the day European Management Journal Vol 16 No 2 April 1998
immediately prior to the announcement of the Forte bid, Granada had a market capitalisation of almost £4.5bn.
Forte Plc Prior to the bid, Forte was a leading hotel and restaurant group, operating approximately 940 hotels with 97,000 rooms and 600 restaurants. Although its interests were predominantly UK-based, they included overseas interests such as its Meridien chain of hotels purchased from Air France, and certain "trophy" hotels such as the George V in Paris. In the year to 31st January 1995, 74% of turnover and 89% of operating profit derived from UK operations in the year to 31st January 1995. The activities of the group ranged from luxury hotels to budget hotel operations through motorway service areas to roadside restaurants. In contrast to Granada, Forte’s shares had underperformed the market since 1991, attributable mainly to lacklustre growth and low return on capital. Critics had long claimed that Sir Rocco owed his position more to lineage than to managerial expertise; he had become CEO in 1982 and a decade later, added the role of Chairman, continuing in the joint role of Chairman and CEO, despite the recommendations of the Cadbury Committee, until the time of the bid. For the period since the end of the 1990/91 financial year, Forte’s five-year financial record included the following grisly statistics: ❖ Operating profit down 11%, pre-tax profit down 28% ❖ EPS down 41% ❖ Dividends per share down 24% ❖ Share price relative to the FTA All Share Index down 40% ❖ Aggregate pre-tax operating cash flow of only £74 million over 5 years At the close of business on the day prior to the announcement of the bid, the Forte equity had a market capitalisation of approximately £2.6bn.
Motivation for the Bid Gerry Robinson arrived at Granada following success at Grand Metropolitan and Compass. He has twice proved his ability to improve efficiency in contract catering operations. Whilst CEO at Compass, he drove margins up to 10%, a level considered high within the industry, and as CEO at Granada, he doubled the margins of Sutcliffe following the Granada takeover. His successes had established him in the public perception as a catering specialist, 231
THE HOSTILE TAKEOVER PROCESS: A CASE STUDY OF GRANADA VERSUS FORTE
Table 1 Granada and Forte Five-year Records
Granada Group plc Sales (£bn) Pre-tax profit (£m) EPS (p) Net div (p) ROI Operating profit (%) Total assets Gearing Borrowings (%) Net assets Interest cover (times)
冉 冉
1991
1992
1993
1994
1995
1996*
1.36 ⫺110 ⫺38.3 7.00
1.34 115 15.2 7.70
1.62 176 25.6 8.75
2.10 265 33.6 10.00
2.38 351 41.3 11.75
394 42.8 12.80
6.7
12.8
13.4
18.5
21.8
70.0
60.3
117.7
114.0
89.4
⫺1.1
4.6
7.2
9.0
10.6
–
2.64 176 17.2 9.91 6.0 47 2.6
2.66 49 3.00 9.91 3.7 56 1.3
2.72 153 12.70 7.50 4.4 63 1.9
2.11 111 9.00 7.50 5.1 71 1.8
1.79 127 10.10 7.50 5.6 64 2.0
1.94 190 14.50 8.50
冊
冊
Forte plc Sales (£bn) Pre-tax profit (£m) EPS (p) Net div (p) ROI (%) Gearing (%) Interest cover (times)
– ⫺
*Merrill Lynch estimates prior to bid
Sources: Granada Group plc and Forte plc Annual Report and Accounts, Investors Chronicle January 19th 1996.
although an insider said his talents were best described in the phrase ‘expert in running businesses’.There was little doubt that Gardner Merchant, originally owned by Forte but the subject of a management buy out in 1992, was the catering company which Robinson would really liked to have bought. Surprised and unimpressed by Forte’s rebuff of Granada’s expression of interest in Gardner Merchant at the time of the MBO, it was this which probably prompted Granada to start looking at Forte in earnest. Robinson probably still believes that Forte should not have disposed of such a strong cash-generating business. If there was synergy with Forte, clearly it lay in the fit with Granada’s Leisure and Services division, in particular, the budget hotels, motorway services and contract catering businesses. Victory for Granada in the takeover bid would make it the UK’s largest hotels operator overnight, with 60,000 rooms to add to its own 1400. The hotel industry had been suffering a slump due to the Gulf War, the effects of the recession of the early 1990s and the unfavourable exchange rate which had kept many visitors away from the UK. However, according to Adele Biss, Chairman of the British Tourist Authority, the industry was now looking forward to a period of strong growth. Quoted in the Financial Times on January 23rd 1996, she said: ‘The value of tourism to Britain........is growing - with hoteliers, who are seeing significant rises in occupancy levels, being among the first to benefit.’ 232
Hotels at each end of the market, from the five star London hotels to the rapidly-growing budget sector (these predominantly roadside hotels had grown by about 70% since 1992), would be the main beneficiaries of this recovery. Additionally, a number of high-profile sales, notably that of the Ritz to the Barclay brothers, attracted by its casino operation, had confirmed high levels of investor interest in "trophy" properties. However, the budget sector was still seen as the underdeveloped one, comprising 3% of the UK market compared to 15% in France and 12% in the US. Forte and Whitbread together accounted for twothirds of this market operating the Travelodge and Travel Inn brands respectively, a business which represented a real opportunity for Granada. Recent Granada acquisitions had generally been motivated by industrial consolidation and synergistic acquisition. Granada’s stated general policy was to buy companies which complemented their existing business and which had scope for performance improvement and strong cash generation. Forte was claimed to be a good fit with the existing Granada portfolio, although the ability of the Group to oversee the running of luxury hotels was widely questioned as this represented a new arena for Granada. Nevertheless, quoted in the Financial Times on 23/11/96, Gerry Robinson attempted to dispel fears by pointing out: ‘I know more about hotels than I knew about television when I took over at Granada.’ European Management Journal Vol 16 No 2 April 1998
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It is difficult to say to what extent any genuine desire for consolidation was a motive for the final bid. Perhaps more important was Granada’s stated belief that Forte had, in recent years, consistently failed to deliver adequate value to its shareholders due, not to lack of potential, but to inefficient management which Granada could put right, creating cost savings without any marked industrial synergy with the Forte portfolio. Some examples of Forte’s failure to maximise the business potential were allegedly: ❖ Misguided strategy: disposal of cash-generating assets (e.g. Gardner Merchant) and retention of ‘trophy’ assets such as the Savoy. This, it was claimed, created imbalance between capital-intensive and cash-generating businesses and increased Forte’s vulnerability to economic cycles. ❖ Failure to meet its own targets: a stated ambition to expand into Europe and reduce reliance on UK operating profits which had not materialised. ❖ Failure to exploit good brands: acquisition of the Crest chain of hotels but failure to integrate this into the group’s branding strategy and erosion of the dominance of the Travelodge chain, especially through Whitbread’s expansion. A further example was the South-East based chain of fish restaurants, Wheelers, which had been allowed to decline (and which Granada proposed to build up again). ❖ Changes in direction: attempts to develop the US business had resulted in low market growth of Travelodge in the US (and its subsequent disposal) substantial investments were made in the Harvester chain which had been divested by this time. In his first report following this acquisition, the Bass chairman claimed that it had been "earningsenhancing from Day 1". The rationale of the bid was that, as part of the larger Granada Group, the significant profit potential in Forte, especially in Little Chef, and in the Posthouse chain where over 40% of turnover was in catering, could be ‘unlocked’, and improved efficiency would be secured through the following strategies: ❖ rejuvenation of the restaurant brands and introduction of franchise operations in line with the successful Burger King franchise ❖ use of the Meridien brand to accelerate international expansion ❖ focusing middle and budget market hotels by rationalising the Posthouse and Travelodge brands ❖ disposal of the sportsgoods seller, Lillywhites (actually disposed of during the bidding period) and investments in the Savoy and Alpha Airports Group. Disposal of Forte Motorway Service Areas would be required as a result of monopoly considerations. ❖ disposal of the ‘exclusives’, the so-called ‘trophy’ European Management Journal Vol 16 No 2 April 1998
hotels, which had high asset values but generated little cash.
Valuation of Forte Market Valuation and Price Earnings Multiples Forte was valued by the stock market at £2.6bn immediately before the bid was announced. This was equivalent to 27 times earnings on a per share basis, although Forte’s rapidly increasing number of shares (due to scrip issues and scrip dividends) led to some confusion and dilution of the actual earnings per share compared with those reported in the accounts. Hence there was a discrepancy between the implied earnings per share of 8.78p quoted by the Financial Times, who appeared to use a year-end share figure, and the 10.1p claimed by Forte, who used a weighted average number of shares for the year (see Appendix 1). The high P/E multiple contrasted to the average of 17.3 for the industry1 and that of 17.5 for Forte’s closest comparator, Stakis. This may have reflected an expectation of increased future earnings from Forte as it improved its operations and benefited from an upturn in the industry. A valuation based on Stakis’ P/E ratio of 17.5 and Forte’s own forecast of 1996 earnings of 14.1p per share (up 40%) indicated a valuation of £2.3bn, which was still below the market valuation at the time of the bid (see Summary Table, Appendix 2 and Figure 1). This indicated either that the market was expecting a continued improved performance from Forte, or that the P/E ratio was artificially elevated due to the combined effects of low earnings and a share price reflecting the net asset value of the company and thus unlikely to fall further (see next section).
Net Assets Forte’s final set of full annual accounts for the year ended 31 January 1995 revealed net assets of £2.46bn, comprised as follows: £m Fixed assets 4,272 Current assets 319 Current Liabilities (550) Long Term Liabilities (1,579) Net Assets 2,462
Total assets i.e. the book value of the whole company, were thus £4.59bn, while tangible fixed assets accounted for 94% of the fixed asset total, the remainder representing investments. Gearing at book values, including short-term borrowings, was 67%. 233
THE HOSTILE TAKEOVER PROCESS: A CASE STUDY OF GRANADA VERSUS FORTE
During 1995, Forte’s interim statement subsequently reported net assets of £2.6bn (operating assets £4091m less net borrowings £1536m; see summary Table, Appendix 2 and Figure 1). This was very close to the market capitalisation value. Normally, it may be expected that the intrinsic value of a company, as a going concern with its management and workforce, would be worth more than the book value of the assets. This implies that the value assigned to the Forte management was either very low or effectively discounted by the large proportion of under-performing assets or that Forte assets were fully valued in the accounts. (The last revaluation had been conducted in January 1994). For example, the stake in the Savoy group cost Forte £144m yet returned only £2m per annum in operating profit, a return of around 1%.
Dividend Growth Model/Cash Flow An alternative valuation can be obtained using the dividend growth model. Although this is not strictly appropriate for valuing whole companies (or whole blocks of equities) it is useful to establish a reference point. In the formula, P0 = D1/(Ke-g), D1 is the future dividend, Ke the cost of equity and g the dividend growth rate. The capital asset pricing model was used to yield a rough estimate for the cost of equity. The information necessary is: Forte  at December 1995 (London Business School) = Historic return on the overall stock market, say = Yield on 3-month Treasury Bills, January 1995 = Whence, required return on ordinary shares = 8% + 1.27(8%) =
Break-Up Value The break-up value can be defined as the value of the individual assets of businesses when sold separately. An attempt to quantify the break-up value has been made by determining the book asset value less the debt finance used to partially finance these assets. Over the course of the bid, several offers for individual businesses were reported in the FT and also by Forte and Granada and some of these implied a ‘premium’ over the book value of the assets (calculated as price above book value less debt). The total value of these premiums has been added to the value of net assets to arrive at an estimate of the break-up value of Forte. It is appreciated that this is a rough and ready measure but detailed information in this area is not readily available to the external observer. Sources for the estimates of the premium are stated in Table 2 and Figure 1.
Granada’s Valuation 8% 8% 18.2%
A long-term real growth rate of 5%, a little ahead of the trend growth in the economy to reflect the income-elastic nature of the demand for hotel services, was then assumed with 3% long-term inflation to yield an inflated-inclusive growth rate of 8%. This set of somewhat optimistic assumptions yields a share price of merely 10.8p = 106p 18.2% ⫺ 8%
Obviously, any lower dividend forecast would depress this valuation. As this corresponds to a total equity capitalisation of around £1bn, a valuation well below its market capitalisation, it was fairly apparent that the market was not valuing Forte on this basis, 234
Forte had also performed poorly in cash flow terms (only £74m net cash flow generation in 5 years) therefore cash flow based valuation techniques are not considered further. An evaluation based on Economic Value-Added would undoubtedly reveal Forte as a destroyer of shareholder value.
1.27
Using the most recent net dividend per share of 7.50p, and applying Forte’s apparently optimistic assessment of the increase in earnings over 1995 (40%) to the dividend payment also, yields a predicted next-time dividend of 10.8p.
Po =
given the past poor dividend performance of Forte. This suggests that Forte was already being valued in the market for its takeover potential.
Granada’s final offer valued Forte’s equity at £3.5bn (£3.8bn including options and convertible bonds). Granada’s own valuation of Forte is likely to remain secret but one can safely assume that the final offer was below their valuation. From the analysis above, it appears likely that Granada’s valuation was based on the break-up of Forte, combined with the potential earnings increase both from the improving market and the potential synergies from the take-over. Granada declared that for the year ended September 1997, the takeover would generate £100m of operating profit above what the market was expecting in July 1995. This was widely interpreted as a concrete prediction that the takeover would generate £100m worth of synergies, a misinterpretation which Granada repeatedly sought to correct.
The Granada Offer Details of the Granada offers (initial and final) are shown in Appendix 3. Granada offered a choice between an all cash offer and a cash-plus-shares offer. In the latter case, the offer was 4 Granada shares plus cash and a Special Dividend of £7.05p for every 15 Forte shares. The maximum value of the European Management Journal Vol 16 No 2 April 1998
THE HOSTILE TAKEOVER PROCESS: A CASE STUDY OF GRANADA VERSUS FORTE
Table 2 Estimation of Break-up Value of Forte. (figs in £m) Granada’s Valuation Total assets Less debts Value of net assets
£4591 (£2129) £2462
Premiums to book values suggested by offers and statements of interest:
Source:
Roadside Exclusives Other assets Posthouse/Crest Forte revaluation Total premium available ‘Value’ of assets
£300 £300 £63 £500 £355 £1518 £2462
Break-up valuation
£3980
final Granada cash-plus-shares offer was 385.1p per Forte Share. During the week following the final offer, the Granada share price increased to 693p which increased the value of the offer by over £100m. In per share terms, Forte shareholders faced a choice between a composite offer worth 386.8p and a cash offer worth 373.8p. In each case, the potential value of the offer was boosted by the possible claw-back by the recipient of the tax credit associated with the payment of the Special Dividend. This was calculated as follows: Special Dividend (net) per 15 Forte shares = 705p Special Dividend per Forte share = 47p Tax credit based on 20% tax rate = 11.75p
Whitbread offer £1050 (BV £700) Offer reported in FT From offers and Market value of Alpha Estimate reported in financial press Estimate reported in financial press
However, it should be noted that the costs of the bid were significant (estimated in some quarters at up to £250m) which would reduce the net profits on disposals or from synergistic cost savings. The final cost of the bid, allowing for assumption of Forte debt is shown in Appendix 4. Obviously, the amount paid for the whole company exceeds the amount paid for the equity alone to reflect the value of Forte assets acquired by borrowing.
Forte’s Defence Tactics
The information in the summary Table, Appendix 2, includes the various methods of valuation of Forte and the values of the two Granada bids. These figures are shown in Figure 1, below. The "caps" on the offer bars represent the additional cost of buying out the share options and convertible bonds.
At the time of the bid, Forte was implementing a reorganisation strategy which, it argued, was about to impact on earnings. The company had strengthened its senior management through the recruitment of 200 new managers over the previous three years and had made careful, yet profitable, disposals of non-core assets worth £900m over the previous two years. These disposals, although profitable, often involved selling cash-generating assets to feed the cash-hungry remainder, especially the ‘exclusives’. Because of this, Robinson pushed home criticism of Forte’s asset management. The key to Forte’s survival seemed to lie in persuading shareholders that Robinson did not appreciate the nuances of the hotel business, and that the share price would not slump following failure of the bid. This argument was based on three main points:
Figure 1 demonstrates that Granada’s first offer was above all market valuations and the net asset value. Further, it indicates how market expectations and the value of Forte were raised by the initial bid and shows that the final offer was above the increased market value. However, the final Granada offer was below the potential break-up value of Forte suggesting that, if (as was probable) this had been Granada’s method of valuation, in the end they paid a full price.
❖ Firstly, that Forte was in the process of being radically restructured as part of a master plan to refocus the business on restaurants and hotels ❖ Secondly, that Granada’s bid was irrational on the basis that Granada was heading towards a 1980s style conglomerate structure. This being the decade of "focus" and of "sticking to the knitting", how could they hope to run a hotel business better than Forte?
Thus the holder of each Forte share was offered the equivalent of a cash dividend net of tax of 47p plus a tax credit of 11.75p, worth 58.75p to non-tax payers such as pension funds and PEP holders. (The cash alternative was deemed to have included the Special Dividend). This procedure valued the tax credits at roughly 949m shares × 11.75p = £116m, although not all shareholders would have been entitled to reclaim the tax paid on their behalf.
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THE HOSTILE TAKEOVER PROCESS: A CASE STUDY OF GRANADA VERSUS FORTE
Figure 1
Summary of Various Measures of the Value of Forte in Relation to Granada’s Bids.
❖ Thirdly, it was important to promote Sir Rocco as a competent and shrewd business man, and not as an urbane country gentleman, as he was presently being cast. (This was not helped by his reportedly having been informed of Granada’s bid whilst grouse-shooting.)
would deter Robinson from the purchase, but he simply used the issue to highlight his argument:
Forte moved swiftly to demonstrate that they were accelerating the disposals plan by selling the Lillywhites sportgoods chain for £28.5m, which was double its book value and considerably higher than analysts’ valuations of £10m. This impressed the City and was quickly followed by the disposal of the American budget hotels chain, Travelodge USA, a strong generator of cash, for £113m. The total proceeds were £173m.
Nevertheless, the Forte PR was having some effect and media editorial was very positive about the deal. Sir Rocco explained the rationale behind the disposal in the light of his intention to demerge hotels and restaurants:
On the 4th of December 1995 Forte announced that they were going to demerge the hotels and restaurants businesses and, more symbolically, that they planned to dispose of their 68% stake in Savoy hotels. This demonstrated Sir Rocco’s resolve to hang on to Forte, since it was well known in the City that acquisition of the Savoy was a personal ambition instigated by his father, Sir Charles Forte, and that father and son had spent the past 14 years building up its stake and trying, unsuccessfully, to win control. (Forte held only a minority of the voting shares). Other disposals continued as Grierson the wine merchants went for £29.5m, and White Hart hotels was put on the market, within a month of the bid. By lunchtime of the Friday before Christmas, they had agreed the sale of the roadside catering businesses to Whitbread for £1.05bn, subject to successful defence of the bid. This price was above analysts’ expectations, but did not dissuade Robinson, who said: ‘In the calm light of the New Year, when share-holders look at this deal, they will see it is less than they would have got for the company in a normal break-up.’
Sir Rocco had presumably anticipated that this 236
‘Far from adding to our problems, it crystallises the key issue - selling something off cheaply which is not performing is a classic mistake.’ (Sunday Times 31/12/95).
‘A sale emphasizes the value in the business very quickly. A demerger would have taken some time because the market would have needed to put a value on the company.’ (Sunday Times 31/12/95).
Forte’s opening defence document highlighted the revitalisation of the management team and the prospective profits of £185m for the year, which had been effectively trebled in three years. This was complemented by a projected 40% increase in earnings per share and the disposal of non-core assets was emphasised. Hints were made that some of the "trophy" hotels might be disposed of and replaced with hotel management contracts, the rationale being to allow real estate specialists to meet the capital requirements, allowing Forte to specialise in managing the asset, thus releasing value very rapidly. There was much conjecture as to the true value of the luxury hotel brands and Sir Rocco had the hotels revalued in an attempt to highlight the true value of Forte. However, this classic tactic backfired as Robinson countered that this emphasised what he had said all along: that Forte was undervalued by the market due to inept management. In its second defence document, Forte made an allout critique of the Granada businesses, claiming that the acquisition did not fit, was further diffusing the focus of their business and alleging that Granada did not have the core skills to manage an international European Management Journal Vol 16 No 2 April 1998
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hotel chain. Forte further claimed that several of Granada’s businesses were in decline (e.g. TV rental) and that their recent profitability was gained mainly through acquisition and not from operating cashflow. It highlighted the significantly higher gearing of 207% (£306bn of debt) compared with Forte’s relatively modest 50%, (attributed by Granada to a ‘full’ valuation of Forte’s assets in the accounts). Granada also pointed out that Forte, nevertheless, still carried over £1bn of debt in its accounts. Signs also emerged of antagonism between the two personalities at the head of the battle. One part of the Forte document contained a schematic of the whole Granada portfolio, spread horizontally over two pages with the headline: ‘All this in four-and-a-half days Mr Robinson?’ The remark was a reference to Gerry Robinson’s reputation for rarely leaving the office later than 5.30 pm. By 2nd January, tactics were focused on issues of hard value. Forte promised to:
An important development on 12th January 1996 occurred when Mark Finnie, of NatWest Securities, and widely regarded as the top analyst in the hotels and leisure sector, came out with a firm recommendation in favour of Granada. Meanwhile, Granada was able to demonstrate the backing of several commercial banks in providing the borrowing facilities required to close the bid, indicating their acceptance of Granada’s gearing as sub-critical.
Towards the end of the bid acceptance period, attention focused on the logistics of share ownership. Forte had claimed that they had support from 35% of shareholders but were forced to retract as they could not substantiate the claim. Sir Rocco resorted to buying £14.7m Forte shares with his own resources to stave off the attack, effectively increasing the voting rights of the Forte family directors to 8.4%. Private Forte put up a spirited and investors who were expected to back the bid made up 15%. defence which contained many Granada owned nearly 10% and institutional shareholders, of the typical tactics associated who held 11% of the shares, decided to go with the Granwith defence campaigns ada bid.
❖ use the cash raised from asset sales to buy back 20% of the issued share capital for a price between 330p and 400p (challenged by Granada as earnings dilutive) ❖ return value directly through share value concentration and increased earnings per share ❖ to distribute shares in Savoy hotels, effectively a bonus of 22p per share.
The emphasis was squarely on the new concept of the focused ‘pure hotel company’. Forte was able to capitalise on the benefits of the recent disposals and promised year-end profits up a further £5m, effectively doubling the results of the previous year. The closing statement included a prospective 21% increase in final year dividend. This bundle of benefits impressed the market and the share price rose 12.5p to 343p - taking it above Granada’s offer, which in its cash version was worth 322p. With the benefit of its ally, Whitbread, Forte was propagating the message that the Granada claim of £100m savings from the Forte businesses was spurious and unfounded. They pointed out that there was some scepticism about this in the market (attributed to a misunderstanding by Granada) and highlighted the drop in the Granada share price following this claim. One tactic that might have appealed to institutional shareholders of all three shares was the idea that two focused businesses, Whitbread and Forte, were preferable to the debt-laden, diversified Granada. Analysts’ reports at the time were suggesting that, at a final bid of 375p, Granada might win assets of £1bn, but would be highly geared and would incur a hefty adviser’s bill. This raised doubts about the potential value to Granada shareholders. European Management Journal Vol 16 No 2 April 1998
Considerable attention was given to the potentially pivotal stake held by Mercury Asset Management, controlled by the redoubtable Carole Galley, known to favour unseating under-performing managements in bid situations. A few years previously, she had swung a major block of shares towards Granada in its take-over of London Weekend Television. Now, MAM held some 15% of Forte’s equity, as well as around 14% of that of Granada. Both protagonists strove to convince MAM, but although it eventually came over to Granada, by this stage, Granada had already won over 50% of acceptances. On January 18th, Rocco finally split the Chairman and Chief Executive roles, retaining the role of CEO. However, this move was probably made far too late and therefore had little persuasive impact. Further diminishing the value of the change was the doubt expressed in editorials at the time, over whether, of the two positions, he had retained the appropriate job. In summary, Forte put up a spirited defence bid which contained many of the typical tactics associated with defence campaigns, namely: ❖ Re-valuing assets ❖ Criticising the opposition strategy and performance ❖ Promising a dividend increase ❖ Publishing improved profits forecasts ❖ Using Whitbread as an ally (similar to the White Knight concept) 237
THE HOSTILE TAKEOVER PROCESS: A CASE STUDY OF GRANADA VERSUS FORTE
❖ Announcing a share repurchase scheme avowedly to enhance earnings (disputed by Granada) ❖ Lobbying institutional shareholders ❖ Raising the profile of management competence by a PR campaign However, what was probably most damaging to Forte was the change of strategy in attempting to dispose of the roadside restaurants, after originally claiming that the restructure plan was for restaurants and hotels. This lowered the credibility of the Forte management team and confirmed that Forte were simply reacting to the initiative of Granada. A widely reported remark by Robinson was that Forte management had displayed more strategy in the last three weeks of the bid than in the previous decade.
Conclusion The key question at the end of the successful bid is whether or not investors were wise to place their faith in Gerry Robinson and Granada who, having won the battle, now faced the tricky job of delivering their promises. Academic evidence is not entirely in their favour, with recently-published research from the Economist Intelligence Unit ("Making Acquisitions Work", 1996) claiming that at least 50% of takeovers are ultimately unsuccessful in the sense that the victor’s share price tends, after the takeover, to underperform the market. On announcement of the success of the bid, Forte shares closed up 11p on the day to 384p, whilst Granada’s share price fell by 18p to 678p. The first major task confronting Gerry Robinson would be to rebuild morale within a Forte group battered by 60 days of fighting and the humiliation of defeat. In addition, he faced three major challenges: ❖ Integrating into Granada the Forte businesses which he wanted to keep, i.e. the roadside restaurants and lodges and the mid-price Posthouse hotels and then improving profits by the promised £100m per year. ❖ Selling off the other businesses, especially the exclusive, luxury hotels, Welcome Break, the Alpha stake and the Savoy hotels shareholding, which together had a book value of around £1.6bn. ❖ Addressing and reducing Granada’s debt which stood at £3.5bn at the end of the bid process against net assets of £1.44bn, representing capital gearing of 250%. It is arguable that concern over Granada’s gearing was overstated. Offsetting the high capital gearing, Granada had strong cashflow and had interest pay238
ments covered four times even before asset disposals (in fact, this level of interest cover exceeded that of Forte prior to the bid). Upmarket hotel and other asset disposals even at book value, if effected quickly, plus the free cash flow from the combined business could cut Granada’s debt to around £1.25bn, reducing gearing to 70%, had it wished. (Pressure on Granada to lower gearing was reduced by receiving an Arating of its debt by Standard and Poor). In summary, there is little doubt that Forte had been under-performing and represented a real opportunity for Granada. Nevertheless, the final price paid appeared to be above market expectations and left Granada having to raise substantial debt to acquire the elements of the Forte business in which it had a long-term interest. Granada, however, anticipated significant cost savings in the Forte business and hoped to further benefit from lucrative disposals. Whatever the fate of Granada and its shareholders, the only certain winners were City-based beneficiaries from the reported fees incurred by the bid. Nevertheless, many of the reports regarding bid costs were probably exaggerated. Granada were estimated to have spent £105m in underwriting, bank loan commitment fees and advisers’ bills. In addition, they picked up Forte’s tab, estimated at £35m, and were expected to incur further expenses of £15-£30m for advice regarding asset disposals (although Forte would have had to incur these advisory costs anyway under its new strategy). Allowing for the nonincremental nature of these costs, and recognising that of the £105m bill faced by Granada, some 80% was in underwriting fees, it is difficult to reconcile these figures with the frequently-quoted sum of £250m allegedly facing Granada. Only time will tell whether this proves to be the "takeover too far" which drags down Granada’s subsequent performance or the latest in a series of spectacularly successful acquisitions for Robinson and his team2.
Acknowledgements The authors wish to thank staff at Granada Group plc, especially Graham Parrott, Group Commercial Director, and also Steve Letza for their helpful comments.
Notes 1. Industry P/E ratios: City centre rest. 17.8. Compass catering 22.9.Friendly hotels 17.1. Regal hotels 17.8. Ryan hotels 10.7. Stakis 17.5 (average 17.3) source FT 15.11.95. 2. This paper emerged from the "teaching assignment" approach adopted on the Bradford MBA, and explained in a forthcoming issue of Accounting Education (Vol. 26) which collects contributions to the BAA SIG Conference, Case Studies in Accounting Education, held at Loughborough in 1995.
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THE HOSTILE TAKEOVER PROCESS: A CASE STUDY OF GRANADA VERSUS FORTE
Appendix 1 Financial Times/Forte Calculations of P/E ratios Data from FT Nov. 15 1995 Share price 253p Market capitalisation Published P/E Share price ratio 28.8 × Implied Implied # earnings shares (253/28.8) 8.78p
£2.395bn £2.53 946.6m
However, stated earnings per share were 10.1p (from Forte accounts), which suggests a P/E ratio of 25 × for this date. (253p/10.1p). Forte calculated earnings per share by dividing the
profit attributable to shareholders by the weighted average number of shares during the year. The FT used a year end figure: Forte version Shareholders’ profits £89m Weighted average number of shares 883m Earnings per share 10.1p Simple average number of shares (943m + 863m)/2 = 903m which would imply earnings of 89/903 = 9.9p. The number of shares increased significantly during the year 1994/5 due to a rights issue to fund the Meridien acquisition. The number of shares increased to 945m by 31/7/95 and to 949m by the time of the bid, due to take-up of dividends in scrip form.
Appendix 2 Summary Table Earnings per share
Price/ earnings
Valuations of Forte equity based on stock market share price before bid Week before 15.11.95 10.1p 28.8x2 25x Day before 21.11.95 10.1p 31.4x 27x After 1st bid 16.01.96 Valuations based on industry P/E taking (Stakis 17.5x on the benchmark) Reported 31.1.95 10.1p 17.5x Adj. for interim 31.7.953 15.3p 17.5x Avg. forecast 31.1.964 13.0p 17.5x Forte forecast 31.1.96 14.1p 17.5x Valuation based on Net Assets As at.... 31.1.955 31.7.954 6 Valuation based on break-up Likely to exceed Granada Bid Valuation (paper and cash) Initial Offer7 Including options and bonds Final offer6 Including options and bonds
Share price (p)
#sharesa (million)
Valuation (£billion)
253p
949
2.4
275p
949
2.6
346p
949
3.3
177p 268p 228p 247p
949 949 949 949
1.7 2.5 2.2 2.3 2.5 2.6 4.0
326.9p 373.3p
949 1,006.88 949 1,006.87
3.1 3.3 3.5 3.8
a
The number of shares in issue at the time of the bid has been used to calculate the valuations. The weighted average number of shares at the time was used by Forte to calculate reported ratios. 2 Quoted in Financial Times - the figure quoted below gives P/E calculated on reported earnings. See Appendix 1 for explanation of FT P/E ratio. 3 By adjusting full year for latest interim statement. 4 Based on analysts forecasts (source Granada bid document) 5 Source company accounts 6 Based on reported offers for individual businesses (source FT and offer/defence documents) 7 Valuation higher if tax credits utilised 8 Increased number of shares due to requirement to buy out options European Management Journal Vol 16 No 2 April 1998
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THE HOSTILE TAKEOVER PROCESS: A CASE STUDY OF GRANADA VERSUS FORTE
Appendix 3 Analysis of the Granada Bid Cash offer per share
Per 15 Forte shares: 4 Granada shares Cash payment
Initial offer 23/11/95
Final offer 08/01/96
Final offer 16/01/96
Final offer 16/01/96
2580p 2325p 4905p
2570p 2325p 4895p 705p 5600p 373.3p 385.1p £3795m £3911m 642.5p
2772p 2325p 5097p 705p 5802p 386.8p 398.6p £3894m £4010m 693p
– – – – – 362.0p 373.8p £3435m £3551m
Additional payment Per Forte share: Incl. tax credits Value of equity* Incl. tax credits Granada share price
321.7p £3292m 645p
*Including share options and bonds convertible into equity.
Appendix 4 Final Cost to Granada* Equity Issued Cash consideration (excluding share issue costs) Net Debt assumed
£m 1,912 2,084 3,996 1,271 5,267
*Source: Granada Group plc Annual Report and Accounts 1996.
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European Management Journal Vol 16 No 2 April 1998
THE HOSTILE TAKEOVER PROCESS: A CASE STUDY OF GRANADA VERSUS FORTE
BILL NEALE, University of Bradford Management Centre, Emm Lane, Bradford, West Yorkshire, BD9 4JL, UK.
CARL HILLS, University of Bradford Management Centre, Emm Lane, Bradford, West Yorkshire, BD9 4JL, UK.
Dr Bill Neale lectures in Accounting and Finance at the University of Bradford Management Centre. He has published extensively in academic and professional journals, and is co-author of Corporate Finance and Investment (Prentice-Hall).
Carl Hills is a 1996 Bradford MBA, now working for Pressure Control Engineering Ltd, which designs and supplies precision equipment to the oil industry.
TONY MILSOM, University of Bradford Management Centre, Emm Lane, Bradford, West Yorkshire, BD9 4JL, UK.
JANE SHARPLES, University of Bradford Management Centre, Emm Lane, Bradford, West Yorkshire, BD9 4JL, UK.
Tony Milsom is a 1996 Bradford MBA, now working for Severn Trent Water plc, in strategic planning.
Jane Sharples is a 1996 Bradford MBA, now working for Gemini Consulting, specialising in drug development in the pharmaceutical industry.
European Management Journal Vol 16 No 2 April 1998
241
PII:
European Management Journal Vol. 16, No. 2, pp. 230–241, 1998 1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain S0263-2373(97)00091-1 0263-2373/98 $19.00 + 0.00
The Hostile Takeover Process: A Case Study of Granada Versus Forte BILL NEALE, University of Bradford Management Centre TONY MILSOM, University of Bradford Management Centre CARL HILLS, University of Bradford Management Centre JANE SHARPLES, University of Bradford Management Centre
This paper presents an analysis, in case-study form, of the hostile bid in 1995 by Granada Group plc, the leisure services conglomerate, for Forte plc, the hotel and restaurant operator. Completed in early 1996, this episode provides a rich illustration of the key elements of the take-over process - motivation and strategy of the bidder, valuation of the target and defence tactics employed by the defending management. In addition, it highlights the role of the central personalities in the process. 1998 Elsevier Science Ltd. All rights reserved
Introduction The takeover process continues to fascinate academics. Issues which have attracted particular attention are the size of take-over premiums, the integration process and the post-acquisition performance of expanded groups. In the last regard, there continues to be a stream of research reports which cast doubt on the efficiency of growth by acquisition as a means of enhancing shareholder victims of their own corporate machismo value. The suspicion remains that some companies become ensnared once they launch a bid, determined to win the "game" at whatever price. Yet there are companies which seem to possess the skills required for pre-acquisition appraisal, bidding and post-acquisition integration. In their respective heydays, Hanson and BTR were renowned takeover exponents, rarely paying excessive amounts and 230
being prepared to walk away when it seemed that higher bidding would destroy value. More recently, the Granada Group has clawed its way back from the financial abyss which it confronted in 1991, via a series of highly successful acquisitions such as Sutcliffe Catering, London Weekend Television and most significantly (in relation to its own size) the hotel and leisure company, Forte plc, concluded in early 1996. Meanwhile, this article presents a case study examination of the Forte take-over, focusing on issues of valuation, bidding and defence tactics. Although not intended to be a "tool-kit" for takeover success, but rather an analysis of the takeover process itself, it does offer important insights into the strategic thinking of the bidder and some hints as to the drawbacks of this venture. We begin by presenting the background to the bid with a brief survey of the recent performance of the two protagonists, before discussing the apparent motivation for the bid. We then examine the valuation of Forte from a number of perspectives and then outline the defence tactics adopted by Forte’s management, before providing a concluding section.
Background to the Bid Granada Group plc’s bid for Forte plc, launched on 22nd November 1995, began one of the most colourful, controversial and most fiercely fought takeover European Management Journal Vol 16 No 2 April 1998
THE HOSTILE TAKEOVER PROCESS: A CASE STUDY OF GRANADA VERSUS FORTE
battles in recent years. At stake in this hostile bid were household names ranging from London’s exclusive Grosvenor House Hotel to the Little Chef chain of roadside restaurants. Adding to the drama were the personalities at the centre of the battle: Gerry Robinson, Chief Executive Officer of Granada, the ninth of ten children of a carpenter, with a track record of the successful Granada turnaround behind him and an enthusiastic City following, versus Sir Rocco Forte, Chairman and CEO of Forte, facing loss of control of a dynastic business painstakingly built up over half a century by his father, Sir Charles (later Lord) Forte.
Granada Group Plc In his final report for the year ended September 1995, the outgoing chairman, Alex Bernstein, recorded the growth of Granada from a company capitalised at £240 million, on his appointment as chairman, to one now valued at over £4 billion. Over these years, it had "grown to be one of the UK’s largest and most profitable companies, with businesses which are market leaders in their industries", committed "to provide high quality at value for money prices". Bernstein was able to bow out by reporting year-on-year increases in turnover, operating profit, earnings per share (fully diluted) and dividend per share of 10, 30, 22 and 17.5% respectively. Its three divisions, Leisure and Services (comprising budget hotels, theme parks, travel operations, motorway services and contract catering), Television (which included an 11% stake in BSkyB, valued at around £650m), and Rental and Computer Services were well balanced in terms of their respective contributions to operating profit (32, 36 and 32%) although less so by contribution to turnover (47, 23.5 and 29.5% respectively). The longestablished TV rental business, the core of the "old" Granada, had become a cash cow as relative tastes for TV acquisition and rental had altered over the years. Overall, Granada had become a strong cash generator, £463 million flowing in from operating activities, although higher capital expenditure, higher dividends and acquisitions had resulted in an increase in net debt by £50m and a small increase in gearing (debt/equity) from 58 to 59%. Emphasis on cash generation had been a cornerstone of Granada’s recent financial policy as it recovered from its problems in the early 1990s. In 1991, before the appointment of Gerry Robinson as CEO, Granada had been in some distress, as shown in Table 1 (below), with operating profitability, ROCE and EPS all declining and a depressed share price. In the four years since Robinson’s appointment, operating profits had almost quadrupled and Granada shares had outperformed the FTA-All Share Index by over 150%. In addition, the group successfully absorbed two major acquisitions in Sutcliffe, the contract caterer, and London Weekend Television. At the close of business on the day European Management Journal Vol 16 No 2 April 1998
immediately prior to the announcement of the Forte bid, Granada had a market capitalisation of almost £4.5bn.
Forte Plc Prior to the bid, Forte was a leading hotel and restaurant group, operating approximately 940 hotels with 97,000 rooms and 600 restaurants. Although its interests were predominantly UK-based, they included overseas interests such as its Meridien chain of hotels purchased from Air France, and certain "trophy" hotels such as the George V in Paris. In the year to 31st January 1995, 74% of turnover and 89% of operating profit derived from UK operations in the year to 31st January 1995. The activities of the group ranged from luxury hotels to budget hotel operations through motorway service areas to roadside restaurants. In contrast to Granada, Forte’s shares had underperformed the market since 1991, attributable mainly to lacklustre growth and low return on capital. Critics had long claimed that Sir Rocco owed his position more to lineage than to managerial expertise; he had become CEO in 1982 and a decade later, added the role of Chairman, continuing in the joint role of Chairman and CEO, despite the recommendations of the Cadbury Committee, until the time of the bid. For the period since the end of the 1990/91 financial year, Forte’s five-year financial record included the following grisly statistics: ❖ Operating profit down 11%, pre-tax profit down 28% ❖ EPS down 41% ❖ Dividends per share down 24% ❖ Share price relative to the FTA All Share Index down 40% ❖ Aggregate pre-tax operating cash flow of only £74 million over 5 years At the close of business on the day prior to the announcement of the bid, the Forte equity had a market capitalisation of approximately £2.6bn.
Motivation for the Bid Gerry Robinson arrived at Granada following success at Grand Metropolitan and Compass. He has twice proved his ability to improve efficiency in contract catering operations. Whilst CEO at Compass, he drove margins up to 10%, a level considered high within the industry, and as CEO at Granada, he doubled the margins of Sutcliffe following the Granada takeover. His successes had established him in the public perception as a catering specialist, 231
THE HOSTILE TAKEOVER PROCESS: A CASE STUDY OF GRANADA VERSUS FORTE
Table 1 Granada and Forte Five-year Records
Granada Group plc Sales (£bn) Pre-tax profit (£m) EPS (p) Net div (p) ROI Operating profit (%) Total assets Gearing Borrowings (%) Net assets Interest cover (times)
冉 冉
1991
1992
1993
1994
1995
1996*
1.36 ⫺110 ⫺38.3 7.00
1.34 115 15.2 7.70
1.62 176 25.6 8.75
2.10 265 33.6 10.00
2.38 351 41.3 11.75
394 42.8 12.80
6.7
12.8
13.4
18.5
21.8
70.0
60.3
117.7
114.0
89.4
⫺1.1
4.6
7.2
9.0
10.6
–
2.64 176 17.2 9.91 6.0 47 2.6
2.66 49 3.00 9.91 3.7 56 1.3
2.72 153 12.70 7.50 4.4 63 1.9
2.11 111 9.00 7.50 5.1 71 1.8
1.79 127 10.10 7.50 5.6 64 2.0
1.94 190 14.50 8.50
冊
冊
Forte plc Sales (£bn) Pre-tax profit (£m) EPS (p) Net div (p) ROI (%) Gearing (%) Interest cover (times)
– ⫺
*Merrill Lynch estimates prior to bid
Sources: Granada Group plc and Forte plc Annual Report and Accounts, Investors Chronicle January 19th 1996.
although an insider said his talents were best described in the phrase ‘expert in running businesses’.There was little doubt that Gardner Merchant, originally owned by Forte but the subject of a management buy out in 1992, was the catering company which Robinson would really liked to have bought. Surprised and unimpressed by Forte’s rebuff of Granada’s expression of interest in Gardner Merchant at the time of the MBO, it was this which probably prompted Granada to start looking at Forte in earnest. Robinson probably still believes that Forte should not have disposed of such a strong cash-generating business. If there was synergy with Forte, clearly it lay in the fit with Granada’s Leisure and Services division, in particular, the budget hotels, motorway services and contract catering businesses. Victory for Granada in the takeover bid would make it the UK’s largest hotels operator overnight, with 60,000 rooms to add to its own 1400. The hotel industry had been suffering a slump due to the Gulf War, the effects of the recession of the early 1990s and the unfavourable exchange rate which had kept many visitors away from the UK. However, according to Adele Biss, Chairman of the British Tourist Authority, the industry was now looking forward to a period of strong growth. Quoted in the Financial Times on January 23rd 1996, she said: ‘The value of tourism to Britain........is growing - with hoteliers, who are seeing significant rises in occupancy levels, being among the first to benefit.’ 232
Hotels at each end of the market, from the five star London hotels to the rapidly-growing budget sector (these predominantly roadside hotels had grown by about 70% since 1992), would be the main beneficiaries of this recovery. Additionally, a number of high-profile sales, notably that of the Ritz to the Barclay brothers, attracted by its casino operation, had confirmed high levels of investor interest in "trophy" properties. However, the budget sector was still seen as the underdeveloped one, comprising 3% of the UK market compared to 15% in France and 12% in the US. Forte and Whitbread together accounted for twothirds of this market operating the Travelodge and Travel Inn brands respectively, a business which represented a real opportunity for Granada. Recent Granada acquisitions had generally been motivated by industrial consolidation and synergistic acquisition. Granada’s stated general policy was to buy companies which complemented their existing business and which had scope for performance improvement and strong cash generation. Forte was claimed to be a good fit with the existing Granada portfolio, although the ability of the Group to oversee the running of luxury hotels was widely questioned as this represented a new arena for Granada. Nevertheless, quoted in the Financial Times on 23/11/96, Gerry Robinson attempted to dispel fears by pointing out: ‘I know more about hotels than I knew about television when I took over at Granada.’ European Management Journal Vol 16 No 2 April 1998
THE HOSTILE TAKEOVER PROCESS: A CASE STUDY OF GRANADA VERSUS FORTE
It is difficult to say to what extent any genuine desire for consolidation was a motive for the final bid. Perhaps more important was Granada’s stated belief that Forte had, in recent years, consistently failed to deliver adequate value to its shareholders due, not to lack of potential, but to inefficient management which Granada could put right, creating cost savings without any marked industrial synergy with the Forte portfolio. Some examples of Forte’s failure to maximise the business potential were allegedly: ❖ Misguided strategy: disposal of cash-generating assets (e.g. Gardner Merchant) and retention of ‘trophy’ assets such as the Savoy. This, it was claimed, created imbalance between capital-intensive and cash-generating businesses and increased Forte’s vulnerability to economic cycles. ❖ Failure to meet its own targets: a stated ambition to expand into Europe and reduce reliance on UK operating profits which had not materialised. ❖ Failure to exploit good brands: acquisition of the Crest chain of hotels but failure to integrate this into the group’s branding strategy and erosion of the dominance of the Travelodge chain, especially through Whitbread’s expansion. A further example was the South-East based chain of fish restaurants, Wheelers, which had been allowed to decline (and which Granada proposed to build up again). ❖ Changes in direction: attempts to develop the US business had resulted in low market growth of Travelodge in the US (and its subsequent disposal) substantial investments were made in the Harvester chain which had been divested by this time. In his first report following this acquisition, the Bass chairman claimed that it had been "earningsenhancing from Day 1". The rationale of the bid was that, as part of the larger Granada Group, the significant profit potential in Forte, especially in Little Chef, and in the Posthouse chain where over 40% of turnover was in catering, could be ‘unlocked’, and improved efficiency would be secured through the following strategies: ❖ rejuvenation of the restaurant brands and introduction of franchise operations in line with the successful Burger King franchise ❖ use of the Meridien brand to accelerate international expansion ❖ focusing middle and budget market hotels by rationalising the Posthouse and Travelodge brands ❖ disposal of the sportsgoods seller, Lillywhites (actually disposed of during the bidding period) and investments in the Savoy and Alpha Airports Group. Disposal of Forte Motorway Service Areas would be required as a result of monopoly considerations. ❖ disposal of the ‘exclusives’, the so-called ‘trophy’ European Management Journal Vol 16 No 2 April 1998
hotels, which had high asset values but generated little cash.
Valuation of Forte Market Valuation and Price Earnings Multiples Forte was valued by the stock market at £2.6bn immediately before the bid was announced. This was equivalent to 27 times earnings on a per share basis, although Forte’s rapidly increasing number of shares (due to scrip issues and scrip dividends) led to some confusion and dilution of the actual earnings per share compared with those reported in the accounts. Hence there was a discrepancy between the implied earnings per share of 8.78p quoted by the Financial Times, who appeared to use a year-end share figure, and the 10.1p claimed by Forte, who used a weighted average number of shares for the year (see Appendix 1). The high P/E multiple contrasted to the average of 17.3 for the industry1 and that of 17.5 for Forte’s closest comparator, Stakis. This may have reflected an expectation of increased future earnings from Forte as it improved its operations and benefited from an upturn in the industry. A valuation based on Stakis’ P/E ratio of 17.5 and Forte’s own forecast of 1996 earnings of 14.1p per share (up 40%) indicated a valuation of £2.3bn, which was still below the market valuation at the time of the bid (see Summary Table, Appendix 2 and Figure 1). This indicated either that the market was expecting a continued improved performance from Forte, or that the P/E ratio was artificially elevated due to the combined effects of low earnings and a share price reflecting the net asset value of the company and thus unlikely to fall further (see next section).
Net Assets Forte’s final set of full annual accounts for the year ended 31 January 1995 revealed net assets of £2.46bn, comprised as follows: £m Fixed assets 4,272 Current assets 319 Current Liabilities (550) Long Term Liabilities (1,579) Net Assets 2,462
Total assets i.e. the book value of the whole company, were thus £4.59bn, while tangible fixed assets accounted for 94% of the fixed asset total, the remainder representing investments. Gearing at book values, including short-term borrowings, was 67%. 233
THE HOSTILE TAKEOVER PROCESS: A CASE STUDY OF GRANADA VERSUS FORTE
During 1995, Forte’s interim statement subsequently reported net assets of £2.6bn (operating assets £4091m less net borrowings £1536m; see summary Table, Appendix 2 and Figure 1). This was very close to the market capitalisation value. Normally, it may be expected that the intrinsic value of a company, as a going concern with its management and workforce, would be worth more than the book value of the assets. This implies that the value assigned to the Forte management was either very low or effectively discounted by the large proportion of under-performing assets or that Forte assets were fully valued in the accounts. (The last revaluation had been conducted in January 1994). For example, the stake in the Savoy group cost Forte £144m yet returned only £2m per annum in operating profit, a return of around 1%.
Dividend Growth Model/Cash Flow An alternative valuation can be obtained using the dividend growth model. Although this is not strictly appropriate for valuing whole companies (or whole blocks of equities) it is useful to establish a reference point. In the formula, P0 = D1/(Ke-g), D1 is the future dividend, Ke the cost of equity and g the dividend growth rate. The capital asset pricing model was used to yield a rough estimate for the cost of equity. The information necessary is: Forte  at December 1995 (London Business School) = Historic return on the overall stock market, say = Yield on 3-month Treasury Bills, January 1995 = Whence, required return on ordinary shares = 8% + 1.27(8%) =
Break-Up Value The break-up value can be defined as the value of the individual assets of businesses when sold separately. An attempt to quantify the break-up value has been made by determining the book asset value less the debt finance used to partially finance these assets. Over the course of the bid, several offers for individual businesses were reported in the FT and also by Forte and Granada and some of these implied a ‘premium’ over the book value of the assets (calculated as price above book value less debt). The total value of these premiums has been added to the value of net assets to arrive at an estimate of the break-up value of Forte. It is appreciated that this is a rough and ready measure but detailed information in this area is not readily available to the external observer. Sources for the estimates of the premium are stated in Table 2 and Figure 1.
Granada’s Valuation 8% 8% 18.2%
A long-term real growth rate of 5%, a little ahead of the trend growth in the economy to reflect the income-elastic nature of the demand for hotel services, was then assumed with 3% long-term inflation to yield an inflated-inclusive growth rate of 8%. This set of somewhat optimistic assumptions yields a share price of merely 10.8p = 106p 18.2% ⫺ 8%
Obviously, any lower dividend forecast would depress this valuation. As this corresponds to a total equity capitalisation of around £1bn, a valuation well below its market capitalisation, it was fairly apparent that the market was not valuing Forte on this basis, 234
Forte had also performed poorly in cash flow terms (only £74m net cash flow generation in 5 years) therefore cash flow based valuation techniques are not considered further. An evaluation based on Economic Value-Added would undoubtedly reveal Forte as a destroyer of shareholder value.
1.27
Using the most recent net dividend per share of 7.50p, and applying Forte’s apparently optimistic assessment of the increase in earnings over 1995 (40%) to the dividend payment also, yields a predicted next-time dividend of 10.8p.
Po =
given the past poor dividend performance of Forte. This suggests that Forte was already being valued in the market for its takeover potential.
Granada’s final offer valued Forte’s equity at £3.5bn (£3.8bn including options and convertible bonds). Granada’s own valuation of Forte is likely to remain secret but one can safely assume that the final offer was below their valuation. From the analysis above, it appears likely that Granada’s valuation was based on the break-up of Forte, combined with the potential earnings increase both from the improving market and the potential synergies from the take-over. Granada declared that for the year ended September 1997, the takeover would generate £100m of operating profit above what the market was expecting in July 1995. This was widely interpreted as a concrete prediction that the takeover would generate £100m worth of synergies, a misinterpretation which Granada repeatedly sought to correct.
The Granada Offer Details of the Granada offers (initial and final) are shown in Appendix 3. Granada offered a choice between an all cash offer and a cash-plus-shares offer. In the latter case, the offer was 4 Granada shares plus cash and a Special Dividend of £7.05p for every 15 Forte shares. The maximum value of the European Management Journal Vol 16 No 2 April 1998
THE HOSTILE TAKEOVER PROCESS: A CASE STUDY OF GRANADA VERSUS FORTE
Table 2 Estimation of Break-up Value of Forte. (figs in £m) Granada’s Valuation Total assets Less debts Value of net assets
£4591 (£2129) £2462
Premiums to book values suggested by offers and statements of interest:
Source:
Roadside Exclusives Other assets Posthouse/Crest Forte revaluation Total premium available ‘Value’ of assets
£300 £300 £63 £500 £355 £1518 £2462
Break-up valuation
£3980
final Granada cash-plus-shares offer was 385.1p per Forte Share. During the week following the final offer, the Granada share price increased to 693p which increased the value of the offer by over £100m. In per share terms, Forte shareholders faced a choice between a composite offer worth 386.8p and a cash offer worth 373.8p. In each case, the potential value of the offer was boosted by the possible claw-back by the recipient of the tax credit associated with the payment of the Special Dividend. This was calculated as follows: Special Dividend (net) per 15 Forte shares = 705p Special Dividend per Forte share = 47p Tax credit based on 20% tax rate = 11.75p
Whitbread offer £1050 (BV £700) Offer reported in FT From offers and Market value of Alpha Estimate reported in financial press Estimate reported in financial press
However, it should be noted that the costs of the bid were significant (estimated in some quarters at up to £250m) which would reduce the net profits on disposals or from synergistic cost savings. The final cost of the bid, allowing for assumption of Forte debt is shown in Appendix 4. Obviously, the amount paid for the whole company exceeds the amount paid for the equity alone to reflect the value of Forte assets acquired by borrowing.
Forte’s Defence Tactics
The information in the summary Table, Appendix 2, includes the various methods of valuation of Forte and the values of the two Granada bids. These figures are shown in Figure 1, below. The "caps" on the offer bars represent the additional cost of buying out the share options and convertible bonds.
At the time of the bid, Forte was implementing a reorganisation strategy which, it argued, was about to impact on earnings. The company had strengthened its senior management through the recruitment of 200 new managers over the previous three years and had made careful, yet profitable, disposals of non-core assets worth £900m over the previous two years. These disposals, although profitable, often involved selling cash-generating assets to feed the cash-hungry remainder, especially the ‘exclusives’. Because of this, Robinson pushed home criticism of Forte’s asset management. The key to Forte’s survival seemed to lie in persuading shareholders that Robinson did not appreciate the nuances of the hotel business, and that the share price would not slump following failure of the bid. This argument was based on three main points:
Figure 1 demonstrates that Granada’s first offer was above all market valuations and the net asset value. Further, it indicates how market expectations and the value of Forte were raised by the initial bid and shows that the final offer was above the increased market value. However, the final Granada offer was below the potential break-up value of Forte suggesting that, if (as was probable) this had been Granada’s method of valuation, in the end they paid a full price.
❖ Firstly, that Forte was in the process of being radically restructured as part of a master plan to refocus the business on restaurants and hotels ❖ Secondly, that Granada’s bid was irrational on the basis that Granada was heading towards a 1980s style conglomerate structure. This being the decade of "focus" and of "sticking to the knitting", how could they hope to run a hotel business better than Forte?
Thus the holder of each Forte share was offered the equivalent of a cash dividend net of tax of 47p plus a tax credit of 11.75p, worth 58.75p to non-tax payers such as pension funds and PEP holders. (The cash alternative was deemed to have included the Special Dividend). This procedure valued the tax credits at roughly 949m shares × 11.75p = £116m, although not all shareholders would have been entitled to reclaim the tax paid on their behalf.
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Figure 1
Summary of Various Measures of the Value of Forte in Relation to Granada’s Bids.
❖ Thirdly, it was important to promote Sir Rocco as a competent and shrewd business man, and not as an urbane country gentleman, as he was presently being cast. (This was not helped by his reportedly having been informed of Granada’s bid whilst grouse-shooting.)
would deter Robinson from the purchase, but he simply used the issue to highlight his argument:
Forte moved swiftly to demonstrate that they were accelerating the disposals plan by selling the Lillywhites sportgoods chain for £28.5m, which was double its book value and considerably higher than analysts’ valuations of £10m. This impressed the City and was quickly followed by the disposal of the American budget hotels chain, Travelodge USA, a strong generator of cash, for £113m. The total proceeds were £173m.
Nevertheless, the Forte PR was having some effect and media editorial was very positive about the deal. Sir Rocco explained the rationale behind the disposal in the light of his intention to demerge hotels and restaurants:
On the 4th of December 1995 Forte announced that they were going to demerge the hotels and restaurants businesses and, more symbolically, that they planned to dispose of their 68% stake in Savoy hotels. This demonstrated Sir Rocco’s resolve to hang on to Forte, since it was well known in the City that acquisition of the Savoy was a personal ambition instigated by his father, Sir Charles Forte, and that father and son had spent the past 14 years building up its stake and trying, unsuccessfully, to win control. (Forte held only a minority of the voting shares). Other disposals continued as Grierson the wine merchants went for £29.5m, and White Hart hotels was put on the market, within a month of the bid. By lunchtime of the Friday before Christmas, they had agreed the sale of the roadside catering businesses to Whitbread for £1.05bn, subject to successful defence of the bid. This price was above analysts’ expectations, but did not dissuade Robinson, who said: ‘In the calm light of the New Year, when share-holders look at this deal, they will see it is less than they would have got for the company in a normal break-up.’
Sir Rocco had presumably anticipated that this 236
‘Far from adding to our problems, it crystallises the key issue - selling something off cheaply which is not performing is a classic mistake.’ (Sunday Times 31/12/95).
‘A sale emphasizes the value in the business very quickly. A demerger would have taken some time because the market would have needed to put a value on the company.’ (Sunday Times 31/12/95).
Forte’s opening defence document highlighted the revitalisation of the management team and the prospective profits of £185m for the year, which had been effectively trebled in three years. This was complemented by a projected 40% increase in earnings per share and the disposal of non-core assets was emphasised. Hints were made that some of the "trophy" hotels might be disposed of and replaced with hotel management contracts, the rationale being to allow real estate specialists to meet the capital requirements, allowing Forte to specialise in managing the asset, thus releasing value very rapidly. There was much conjecture as to the true value of the luxury hotel brands and Sir Rocco had the hotels revalued in an attempt to highlight the true value of Forte. However, this classic tactic backfired as Robinson countered that this emphasised what he had said all along: that Forte was undervalued by the market due to inept management. In its second defence document, Forte made an allout critique of the Granada businesses, claiming that the acquisition did not fit, was further diffusing the focus of their business and alleging that Granada did not have the core skills to manage an international European Management Journal Vol 16 No 2 April 1998
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hotel chain. Forte further claimed that several of Granada’s businesses were in decline (e.g. TV rental) and that their recent profitability was gained mainly through acquisition and not from operating cashflow. It highlighted the significantly higher gearing of 207% (£306bn of debt) compared with Forte’s relatively modest 50%, (attributed by Granada to a ‘full’ valuation of Forte’s assets in the accounts). Granada also pointed out that Forte, nevertheless, still carried over £1bn of debt in its accounts. Signs also emerged of antagonism between the two personalities at the head of the battle. One part of the Forte document contained a schematic of the whole Granada portfolio, spread horizontally over two pages with the headline: ‘All this in four-and-a-half days Mr Robinson?’ The remark was a reference to Gerry Robinson’s reputation for rarely leaving the office later than 5.30 pm. By 2nd January, tactics were focused on issues of hard value. Forte promised to:
An important development on 12th January 1996 occurred when Mark Finnie, of NatWest Securities, and widely regarded as the top analyst in the hotels and leisure sector, came out with a firm recommendation in favour of Granada. Meanwhile, Granada was able to demonstrate the backing of several commercial banks in providing the borrowing facilities required to close the bid, indicating their acceptance of Granada’s gearing as sub-critical.
Towards the end of the bid acceptance period, attention focused on the logistics of share ownership. Forte had claimed that they had support from 35% of shareholders but were forced to retract as they could not substantiate the claim. Sir Rocco resorted to buying £14.7m Forte shares with his own resources to stave off the attack, effectively increasing the voting rights of the Forte family directors to 8.4%. Private Forte put up a spirited and investors who were expected to back the bid made up 15%. defence which contained many Granada owned nearly 10% and institutional shareholders, of the typical tactics associated who held 11% of the shares, decided to go with the Granwith defence campaigns ada bid.
❖ use the cash raised from asset sales to buy back 20% of the issued share capital for a price between 330p and 400p (challenged by Granada as earnings dilutive) ❖ return value directly through share value concentration and increased earnings per share ❖ to distribute shares in Savoy hotels, effectively a bonus of 22p per share.
The emphasis was squarely on the new concept of the focused ‘pure hotel company’. Forte was able to capitalise on the benefits of the recent disposals and promised year-end profits up a further £5m, effectively doubling the results of the previous year. The closing statement included a prospective 21% increase in final year dividend. This bundle of benefits impressed the market and the share price rose 12.5p to 343p - taking it above Granada’s offer, which in its cash version was worth 322p. With the benefit of its ally, Whitbread, Forte was propagating the message that the Granada claim of £100m savings from the Forte businesses was spurious and unfounded. They pointed out that there was some scepticism about this in the market (attributed to a misunderstanding by Granada) and highlighted the drop in the Granada share price following this claim. One tactic that might have appealed to institutional shareholders of all three shares was the idea that two focused businesses, Whitbread and Forte, were preferable to the debt-laden, diversified Granada. Analysts’ reports at the time were suggesting that, at a final bid of 375p, Granada might win assets of £1bn, but would be highly geared and would incur a hefty adviser’s bill. This raised doubts about the potential value to Granada shareholders. European Management Journal Vol 16 No 2 April 1998
Considerable attention was given to the potentially pivotal stake held by Mercury Asset Management, controlled by the redoubtable Carole Galley, known to favour unseating under-performing managements in bid situations. A few years previously, she had swung a major block of shares towards Granada in its take-over of London Weekend Television. Now, MAM held some 15% of Forte’s equity, as well as around 14% of that of Granada. Both protagonists strove to convince MAM, but although it eventually came over to Granada, by this stage, Granada had already won over 50% of acceptances. On January 18th, Rocco finally split the Chairman and Chief Executive roles, retaining the role of CEO. However, this move was probably made far too late and therefore had little persuasive impact. Further diminishing the value of the change was the doubt expressed in editorials at the time, over whether, of the two positions, he had retained the appropriate job. In summary, Forte put up a spirited defence bid which contained many of the typical tactics associated with defence campaigns, namely: ❖ Re-valuing assets ❖ Criticising the opposition strategy and performance ❖ Promising a dividend increase ❖ Publishing improved profits forecasts ❖ Using Whitbread as an ally (similar to the White Knight concept) 237
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❖ Announcing a share repurchase scheme avowedly to enhance earnings (disputed by Granada) ❖ Lobbying institutional shareholders ❖ Raising the profile of management competence by a PR campaign However, what was probably most damaging to Forte was the change of strategy in attempting to dispose of the roadside restaurants, after originally claiming that the restructure plan was for restaurants and hotels. This lowered the credibility of the Forte management team and confirmed that Forte were simply reacting to the initiative of Granada. A widely reported remark by Robinson was that Forte management had displayed more strategy in the last three weeks of the bid than in the previous decade.
Conclusion The key question at the end of the successful bid is whether or not investors were wise to place their faith in Gerry Robinson and Granada who, having won the battle, now faced the tricky job of delivering their promises. Academic evidence is not entirely in their favour, with recently-published research from the Economist Intelligence Unit ("Making Acquisitions Work", 1996) claiming that at least 50% of takeovers are ultimately unsuccessful in the sense that the victor’s share price tends, after the takeover, to underperform the market. On announcement of the success of the bid, Forte shares closed up 11p on the day to 384p, whilst Granada’s share price fell by 18p to 678p. The first major task confronting Gerry Robinson would be to rebuild morale within a Forte group battered by 60 days of fighting and the humiliation of defeat. In addition, he faced three major challenges: ❖ Integrating into Granada the Forte businesses which he wanted to keep, i.e. the roadside restaurants and lodges and the mid-price Posthouse hotels and then improving profits by the promised £100m per year. ❖ Selling off the other businesses, especially the exclusive, luxury hotels, Welcome Break, the Alpha stake and the Savoy hotels shareholding, which together had a book value of around £1.6bn. ❖ Addressing and reducing Granada’s debt which stood at £3.5bn at the end of the bid process against net assets of £1.44bn, representing capital gearing of 250%. It is arguable that concern over Granada’s gearing was overstated. Offsetting the high capital gearing, Granada had strong cashflow and had interest pay238
ments covered four times even before asset disposals (in fact, this level of interest cover exceeded that of Forte prior to the bid). Upmarket hotel and other asset disposals even at book value, if effected quickly, plus the free cash flow from the combined business could cut Granada’s debt to around £1.25bn, reducing gearing to 70%, had it wished. (Pressure on Granada to lower gearing was reduced by receiving an Arating of its debt by Standard and Poor). In summary, there is little doubt that Forte had been under-performing and represented a real opportunity for Granada. Nevertheless, the final price paid appeared to be above market expectations and left Granada having to raise substantial debt to acquire the elements of the Forte business in which it had a long-term interest. Granada, however, anticipated significant cost savings in the Forte business and hoped to further benefit from lucrative disposals. Whatever the fate of Granada and its shareholders, the only certain winners were City-based beneficiaries from the reported fees incurred by the bid. Nevertheless, many of the reports regarding bid costs were probably exaggerated. Granada were estimated to have spent £105m in underwriting, bank loan commitment fees and advisers’ bills. In addition, they picked up Forte’s tab, estimated at £35m, and were expected to incur further expenses of £15-£30m for advice regarding asset disposals (although Forte would have had to incur these advisory costs anyway under its new strategy). Allowing for the nonincremental nature of these costs, and recognising that of the £105m bill faced by Granada, some 80% was in underwriting fees, it is difficult to reconcile these figures with the frequently-quoted sum of £250m allegedly facing Granada. Only time will tell whether this proves to be the "takeover too far" which drags down Granada’s subsequent performance or the latest in a series of spectacularly successful acquisitions for Robinson and his team2.
Acknowledgements The authors wish to thank staff at Granada Group plc, especially Graham Parrott, Group Commercial Director, and also Steve Letza for their helpful comments.
Notes 1. Industry P/E ratios: City centre rest. 17.8. Compass catering 22.9.Friendly hotels 17.1. Regal hotels 17.8. Ryan hotels 10.7. Stakis 17.5 (average 17.3) source FT 15.11.95. 2. This paper emerged from the "teaching assignment" approach adopted on the Bradford MBA, and explained in a forthcoming issue of Accounting Education (Vol. 26) which collects contributions to the BAA SIG Conference, Case Studies in Accounting Education, held at Loughborough in 1995.
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Appendix 1 Financial Times/Forte Calculations of P/E ratios Data from FT Nov. 15 1995 Share price 253p Market capitalisation Published P/E Share price ratio 28.8 × Implied Implied # earnings shares (253/28.8) 8.78p
£2.395bn £2.53 946.6m
However, stated earnings per share were 10.1p (from Forte accounts), which suggests a P/E ratio of 25 × for this date. (253p/10.1p). Forte calculated earnings per share by dividing the
profit attributable to shareholders by the weighted average number of shares during the year. The FT used a year end figure: Forte version Shareholders’ profits £89m Weighted average number of shares 883m Earnings per share 10.1p Simple average number of shares (943m + 863m)/2 = 903m which would imply earnings of 89/903 = 9.9p. The number of shares increased significantly during the year 1994/5 due to a rights issue to fund the Meridien acquisition. The number of shares increased to 945m by 31/7/95 and to 949m by the time of the bid, due to take-up of dividends in scrip form.
Appendix 2 Summary Table Earnings per share
Price/ earnings
Valuations of Forte equity based on stock market share price before bid Week before 15.11.95 10.1p 28.8x2 25x Day before 21.11.95 10.1p 31.4x 27x After 1st bid 16.01.96 Valuations based on industry P/E taking (Stakis 17.5x on the benchmark) Reported 31.1.95 10.1p 17.5x Adj. for interim 31.7.953 15.3p 17.5x Avg. forecast 31.1.964 13.0p 17.5x Forte forecast 31.1.96 14.1p 17.5x Valuation based on Net Assets As at.... 31.1.955 31.7.954 6 Valuation based on break-up Likely to exceed Granada Bid Valuation (paper and cash) Initial Offer7 Including options and bonds Final offer6 Including options and bonds
Share price (p)
#sharesa (million)
Valuation (£billion)
253p
949
2.4
275p
949
2.6
346p
949
3.3
177p 268p 228p 247p
949 949 949 949
1.7 2.5 2.2 2.3 2.5 2.6 4.0
326.9p 373.3p
949 1,006.88 949 1,006.87
3.1 3.3 3.5 3.8
a
The number of shares in issue at the time of the bid has been used to calculate the valuations. The weighted average number of shares at the time was used by Forte to calculate reported ratios. 2 Quoted in Financial Times - the figure quoted below gives P/E calculated on reported earnings. See Appendix 1 for explanation of FT P/E ratio. 3 By adjusting full year for latest interim statement. 4 Based on analysts forecasts (source Granada bid document) 5 Source company accounts 6 Based on reported offers for individual businesses (source FT and offer/defence documents) 7 Valuation higher if tax credits utilised 8 Increased number of shares due to requirement to buy out options European Management Journal Vol 16 No 2 April 1998
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Appendix 3 Analysis of the Granada Bid Cash offer per share
Per 15 Forte shares: 4 Granada shares Cash payment
Initial offer 23/11/95
Final offer 08/01/96
Final offer 16/01/96
Final offer 16/01/96
2580p 2325p 4905p
2570p 2325p 4895p 705p 5600p 373.3p 385.1p £3795m £3911m 642.5p
2772p 2325p 5097p 705p 5802p 386.8p 398.6p £3894m £4010m 693p
– – – – – 362.0p 373.8p £3435m £3551m
Additional payment Per Forte share: Incl. tax credits Value of equity* Incl. tax credits Granada share price
321.7p £3292m 645p
*Including share options and bonds convertible into equity.
Appendix 4 Final Cost to Granada* Equity Issued Cash consideration (excluding share issue costs) Net Debt assumed
£m 1,912 2,084 3,996 1,271 5,267
*Source: Granada Group plc Annual Report and Accounts 1996.
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BILL NEALE, University of Bradford Management Centre, Emm Lane, Bradford, West Yorkshire, BD9 4JL, UK.
CARL HILLS, University of Bradford Management Centre, Emm Lane, Bradford, West Yorkshire, BD9 4JL, UK.
Dr Bill Neale lectures in Accounting and Finance at the University of Bradford Management Centre. He has published extensively in academic and professional journals, and is co-author of Corporate Finance and Investment (Prentice-Hall).
Carl Hills is a 1996 Bradford MBA, now working for Pressure Control Engineering Ltd, which designs and supplies precision equipment to the oil industry.
TONY MILSOM, University of Bradford Management Centre, Emm Lane, Bradford, West Yorkshire, BD9 4JL, UK.
JANE SHARPLES, University of Bradford Management Centre, Emm Lane, Bradford, West Yorkshire, BD9 4JL, UK.
Tony Milsom is a 1996 Bradford MBA, now working for Severn Trent Water plc, in strategic planning.
Jane Sharples is a 1996 Bradford MBA, now working for Gemini Consulting, specialising in drug development in the pharmaceutical industry.
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