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Question 1: Do you agree that the Granada's Bid was a Take Over waiting to Happen?
The Corporate takeovers usually happen when one public limited (stock exchange traded) company is not able to perform well and in turn is in financial crisis. The other companies try to acquire the financially underperforming company in order to generate more shareholder wealth. The reason often stated by financial managers is that the market value after acquiring the company is greater then the individual market value of the two companies that is the buyer and the acquired company. This increase in the shareholders wealth is mathematically defined as follows, assuming X and Y are two companies.
PVX+Y > (PVX + PVY)
Economic motives are evidently present, why Granada Group plc is interested in buying Forte plc. The sales of Forte over last five years has shown the potential of increasing Granada's revenue generation and hence increased cash flows, also keeping in mind the synergies present in the businesses also directs towards decreased costs of operation. For example if we combine 1995's sale of both the companies (2.38b + 1.79b) we can see a increase of almost 130% in revenues of Granada which is one of the reasons why the takeover was waiting to happen.
One of the Granada's division, Leisure and services comprised of budget hotels, theme parks, motorway services, travel services and contract catering fully complement Forte's businesses (Hotels and roadside restaurants) and therefore synergy arises for increased profitability.
Over the years the interest cover is decreased for Forte making it more vulnerable to default and unable to pay its debts. This is another reason why I think the takeover was waiting to happen.
The likely increase in Earnings per Share (EPS) also directs towards a successful takeover, in 1995 the EPS for Granada was 41.3p and the EPS for Forte was 10.10p, these figures compared to the relative market capitalization of both the companies (4.5 billion and 2.6 billion) indicates the increase in EPS after the takeover, The Price to Earning ratio of Granada in also greater then Forte which also predicts the same result.
The upward trend in the industry after the Gulf war and stabilizing exchange rates provide a high time for the bidder to capitalize on the situation. Provided with the strategy given by the Granada to take the current potential of Forte in catering to up to 40 percent in not something to do with restructuring or other investment but it is just unlocking the current potential.
Finally I would say taking in to consideration the poor performance of Forte financially and the last five year Granada's continued growth by acquiring different businesses and performing well above the industry FTA-ALL share index by 150 percent is the reason why this takeover was waiting to happen.
Question 2: Consider the valuations of Forte presented in the Case study. Criticize these, on the information given. What value would you have placed for Forte?
The book value given by the balance sheet is £2,462 million for the end of January 1995 and the market value of Forte is £2.6 billion. The gearing is 60% for the end of 1995, this gives the debts are £1477.2 million, so one thing is clear that Forte is 60% debt financed. The valuation is further become complex by issuance of scrip shares in exchange of cash dividends, this makes the calculation of earnings per share more complex and the discrepancy between the implied EPS (8.78p) printed by Financial times and announced EPS(10.1p) by Forte gives a confused signal about the companies earning, based on this single discrepancy we can say that the market capitalization is not a true representation of this company and that it could be actually under valued in the market.
Even using industry average Price to earning ratio (17.3) as a benchmark and Forte's own forecasted EPS of 14.1p per share gives a valuation (£2.3 billion) which is even under valued then the market value of the company. We can deduce that there is some potential in the company for future earning from these figures and thus the true valuation is likely to be more than the current market valuation which is £2.6 billion.
Granada's initial valuation of Forte was 3.3 billion (paper and cash) and final valuation was 3.8 billion (paper and cash), this valuation was very optimistic given the gearing ratio of Forte, which cost Granada to pay out a final amount of £5,267 million (Equity and cash). As we seen above the market valuation is also way below these estimates, which makes the Granada's bid too optimistic about the future performance of the hotel budget sector especially in UK. Furthermore the Tax credit benefit is only for non-tax payers share holders. The figure in the case study clearly shows the initial bid by Granada is far above by all other valuations but after the initial bid the market moves in favour of the Forte's share price and showed that the market expectation has grown and consequently the final bid was higher than the initial one. Nevertheless the final bid was still lower then the break up value of Forte that suggested Granada was taking break-up value of individual businesses as their main valuation method.
If we consider Fortes' prediction of dividend of 14.1p to be paid in 1996 and take the historic return on overall stock market to be 8% and predict that the Fortes' share price to be 693 * [8% +1.27 (8%)] = 819.126 (as per given in the case study)in 1996 when the dividend will be paid out. That makes the estimated future price of the Fortes' share to be 819.126. If we discount this amount with 18.2 percent after adding the optimistic dividend forecast we get the share price to be slightly higher then 693p but this is because of the optimistic predictions, the only thing which adds the value are the strengthening market conditions specially for the tourist industry and Granada's capability to include businesses for value creation.
Question 3: To what extent do you consider the Forte's defence was credible?
The Forte's defence tactics was mainly based on the argument that the restructuring of the management team that includes hiring 200 new managers over the last 3 years and disposal of the non-cash generating assets of worth 900 million over the last two years will help them to achieve the target of £185 million of profits this year that is in 1996. The main defence was Forte claiming to its share holders about the fore coming of the market up trend in the Hotel industry, which I think was the very reason Granada was interested in this hostile takeover. Making the share holder believe that the market conditions are good and the predicted future profits are well attainable will not only boost the company moral but also leave the share price unaffected by the unsuccessful bid by Granada Group plc.
The tactics were well justified as Forte was involve in disposals of more and more non-profitable businesses. I think the demerging of hotels and restaurant businesses was a very important step to sustain its businesses.
The stigma attached to Sir Rocco's name was a major factor in the bidding processes, and to make the things right, Forte dispose of 68% stake in Savoy Hotels (The takeover was considered Sir Rocco's personal ambition) in order to show that the business is running purely on progressive attitude rather then personal ambitions.
The defence in the media from the Forte was very strong, as some of the moves by Granada's Robinson were anticipated by Sir Rocco and properly confronted on the media; this gives some positive editorial about the Forte's deal to sell its road side catering business to the Whitbread for £1.05 billion.
The Granada would revamp Forte's middle and budget-market hotels under the Posthouse and Travelodge names. It would "capitalise decisively" on Forte's upmarket hotel brand, Meridian, axe Lilywhites, and dispose of its stake in the Savoy Group and the Alpha Airports Group. The restaurant brands, which include Happy Eater and Little Chef, would be "rejuvenated", according to the bid document but much of what Granada is suggesting is already on Forte's agenda and their defence make sense, especially given the some what non synergy of Granada with hotel industry.
I think the defence was credible to the extent where the Forte was trying to restructure its businesses and adding cash through selling non-core divisions to get more focused on the hotel industry and strengthening its brand name which is originally its main business, as Forte was one of the oldest established hotel business in the UK and combined with Whitbread the market share was almost third of the industry.
Question 4: Why do you think no White Knight Emerged?
White knight in the Mergers & Acquisitions' terms is the friendly acquirer of the company. The bid was entirely hostile and was fiercely fought against and created media hype as well, for this reason we can say that there were no expectations from the beginning that any white knight will emerge. The motives given in the case study by Granada were the success of the group in acquiring different business and grow in size to greater revenues and put the businesses in-line with their businesses with out changing much of the core the acquired business, but only changing the structure and strategic objectives. Granada's Robinson was initially in 1992 was hoping for the management buy-out of Gardner Merchant (Owned by Forte) but left hopeless when Forte decided to invest in this business of theirs instead of placing it for management buy out, this started a corporate conflict between these two companies.
Furthermore Granada acquisitions were more generally motivated by industrial consolidation and managerial synergies but here we see that Granada has failed to show proper interest in Forte due to it is been a business that compliment Granada's businesses but more importance was given to Forte's current poor stock performance and held the management responsible for lack of performance rather then the inherent potential of the business that argument is certain to bring management conflicts and no white knight expected to emerge.
On the other hand Forte's resistance to Granada's bid make it very difficult for any friendly acquisition. The brand built by Sir Rocco father has an attached family name and the end of a dynastic business certainly not give any white knights.
Finally the values for the business the two company hold are different, there is no guarantee that the acquirer will hold the same values to the family brand names and not dispose them for mere financial gains. For example at the time of the bid Forte was already restructuring according to their values and claimed they are doing the some strategic wise what Granada wants to do, so the need to buy out business is not relevant. Arguments like these from both sides certainly make sure that there are no white knight emerged from this acquisition.
Question 5: Has Granada delivered the goods?
The cornerstone of Granada's hostile 3.8bn bid for the Forte group is a ruthless reassessment of the company's brands and based on this the following steps taken by the Granada Group are given in chronological order taken from http://ketupa.net/granada2.htm. These are the steps taken to organize the takeover in line with the current business.
1996 buys Forte hotels and catering group for £3.6bn
1996 sells White Hart hotel chain for £121.7m
1996 sells George V Hotel in Paris to Prince al-Waleed bin Talal for £104m
1996 sells Hyde Park Hotel for £86m
1996 sells 25% stake in Alpha Airports catering to Mohamed al Fayed for £52.3m
1997 sells Brown's Hotel for £45m
1997 closes 100 of Granada's 562 high street stores
1997 sells 21-strong Welcome Break service station chain to Investcorp of Bahrain for £476m
1997 Granada Media Group formed after acquisition of Yorkshire-Tyne Tees Television for £711m
1997 sells Westbury hotels for £90m
1997 sells American Adventure theme park in Ilkeston, Derbyshire for £3.5m
1997 sells National Sporting Club for £1m
1997 buys AJ's Family Restaurants for £3m
1997 buys Baxter & Platts contract catering for £15m
1997 Granada, News-controlled BSkyB and Carlton Communications announce British Digital Broadcasting consortium
1998 BSkyB withdraws, Granada and Carlton launch ON Digital
1998 Granada sells 9.5% stake in Granada Sky Broadcasting to BSkyB, retaining 50.5% holding
1998 buys Post Office's 49% stake in Quadrant catering for £20m
1998 sells Camelot theme park for £16m
1998 sells Cavendish, The Russell, and The Saint-George's hotels in London for £140m
1998 sells Granada Vending Services for £35m
1998 Artist Services acquired by Granada for est $28m
1999 buys 9.9% stake in Liverpool Football Club for £22m
1999 buys Letts Educational publishing
1999 buys Black Cat software
1999 establishes Box Clever as joint venture with Rental Holdings. Box Clever pays £600m for Granada Technology Group
The group currently has
several ITV franchises (accounting for over half the UK commercial tv advertising revenue),
a digital television unit and stakes in traditional pay tv,
strategic interests in two football clubs,
a large film library,
film/tv production units and
stakes in Australia's Seven Network and Village Roadshow.
From above chronologically given financial decisions up till 1999 we see the businesses acquired by the Granada from Forte are constantly been removed from the portfolio, the reasons are not clear as not much study been done in this respect but certainly the Group is more focused towards media industry especially TV industry. This in a way justifies the Forte's defence that the Group trying to buy itself will lack focus and eventually will lead wealth depletion for the share holders.