The 3.3bn extremely hostile bid for Forte from Granada is moving faster than most corporate battles conducted from entrenched positions. By Monday, there was growing word in City parlours of Forte’s demerger manoeuvre and by mid-morning it hit the screens – a defence technique of the ICI/Zeneca variety, which may have been achieved with or without the assistance of Sir Rocco’s old school chum, JP Morgan vice-chairman Roberto Mendoza.
This was always to be the week of Forte’s defence document, but the demerger sensation depended on whether the taxation trick-cyclists had got their act together. I understand that a demerger has been on Forte’s table since the summer. It would, in the normal course of events, have been something to announce next spring, alongside results and at the start of a new tax year.
But if the demerger proposal has recently caused some late nights for the Forte team, it will cause some sleepless ones for Granada’s Gerry Robinson. By spinning off the restaurant interests of Forte (Happy Eaters, Little Chefs and the like) and creating a residual hotel chain, with or without the Savoy, Sir Rocco could well be providing the shareholder value – for both old and new shareholders – that Robinson himself has been promising.
The move puts the new restaurants company in play for potential purchasers on both sides of the Atlantic. In itself, that is an initiative that can be expected to ramp the price of Forte’s eateries. Then there will be the sale of the prestigious Savoy hotels from the other new Forte company. Since Robinson appears to be obsessed by Sir Rocco’s own obsession with “trophy” hotels, such a move will seriously undermine a fundamental tenet of the bidder’s case.
Forte is said to have had bids for its Savoy interest before – presumably the old guard that defended the Savoy from the Forte barbarian could be persuaded to put its hand in its collective pocket. And shareholders may have grounds for deciding that Forte is best placed to do the selling, rather than Granada.
Sir Rocco’s recent sales record is not bad. He sold Harvester to Bass for 165m, when the market expected 120m at best. In the face of Granada’s chortlings that Lillywhite’s should have gone years ago and has only been retained for sentimental reasons, Sir Rocco was still able to find a buyer at twice book value (no mean feat in the current retail market). And then there are the complex Meridien contracts; Forte has to re-bid for them and, while Granada would have us believe that there is no problem, it might be said that Sir Rocco looks as if he can strike a mean deal.
It should also be added that Sir Rocco has corporate fashion on his side, an aspect of the deal that should not be entirely discounted. Demerger is something of a Nineties craze, as conglomerates were in the Eighties. The latter became recognised for what they are – the increasingly desperate attempts of widely diversified companies to continue to deliver earnings growth. Some prospered as a result, notably Hanson, while others didn’t. Witness British & Commonwealth and Coloroll to name but two.
Institutional investors are not what they were in the Eighties, thank heaven. Demerger, rather than rampant acquisition, is seen as an ideal means of delivering value from a mature conglomerate – the ICI precedent did much to serve this purpose. Granada, widely diversified from television to motorway services, is pushing against the trend. As stockbroker James Capel leisure analyst Max Dolding puts it, Granada is bidding for Forte “because it’s there”.
Granada does, indeed, have a mountain to climb. According to Julie Farrar, an analyst with Edinburgh-based Sutherland & Partners (where they are not easily impressed by London hotels), Granada has a lack of management experience in hotels. Its strategy proposals either replicate what Forte is already doing or demonstrate a short-termism which would be unsuitable for a capital-intensive businesses such as hotels; and, finally and most practically, an increased bid in excess of 375p would lead to material dilution of and damage to Granada’s share price.
One is forced to wonder, therefore, why Robinson so vehemently believes the game is worth the candle, especially in the light of a Forte demerger. Notwithstanding Dolding’s Himalayan theory, there is a pressure that drives Granada in its anachronistic, Eighties’-style growth.
It arises from its television interests. According to Goldman Sachs, Carlton and Granada are the most exposed geographically of the ITV franchisees to the advent of Channel 5. Given that Granada also faces the double-whammy of exposure in Carlton’s region through LWT, Goldman Sachs reckons Granada could face a diminution of television profits of some 12m. That concentrates the mind on seeking earners outside the sector.
Which means growth by acquisition. If Sir Rocco shows he can deliver earnings through demerger, he will not only win the day but confirm that he is of his time – a manager, rather than a mega-bidder. That might mean the old patriarch, Charles, will have found confidence in succession and can, at last, retire in peace.