Fool's Eye View

[ July 10, 2000 ]

Gazing Up At Granada

By Christopher Spink (TMFEagle)

Great Titchfield Street, London -- Granada (LSE: GAA) is a company consumers cannot fail to be aware of. Every viewer of Coronation Street knows that Granada makes the evergreen soap. Most motorway users must have visited a Granada service station for essential roadside stops. Why then does the Granada discussion board here at the Motley Fool look as deserted as a Scottish Highlands B-road in winter?

The company has long been a strange amalgam. More than that, the mix of media interests and hospitality outlets has only managed to make the group's overall workings seem somewhat murky. Indeed a recent Fool's Eye View, written when the group released interim results in mid-May, wondered "What is Granada for?". Tomorrow things might become a little clearer. Granada Media obtains its own listing on the London Stock Exchange, putting a value on that side of the business.

Many have argued that this de-merger should have happened ages ago, so that investors knew exactly what they were backing. However, although on the surface the media interests will be separated from the catering and hospitality businesses, the details have failed to excite many institutions who are stumping up the money to take a 20% stake in Granada's media arm. Why has enthusiasm been dampened? To find out we need to scratch beneath the surface of these cosmetic moves.

Digging deeper

Granada's ultimate plan is to completely separate the two sides of its business. To this end the hospitality group will merge with Compass (LSE: CPG), the UK's leading restaurant services and contract catering group. This will be completed by the end of the month. Before this goes ahead though Granada realised it had to gain a separate quote for its media arm, particularly as it needs to use shares in order to be involved in the consolidation of the ITV broadcasters. Investors wouldn't have wanted to accept shares in a company dominated by a low-margin food making business.

A full demerger of the two businesses will take place within a year. Tomorrow's partial flotation of 20% of the media interests looks like rather a stopgap measure on the road to this eventual goal. It is more caused by immediate necessity than anything else. Many have gone further and complained that the Compass merger is just the final flourish of debonair dealmaker Gerry Robinson's career. That may be slightly unfair. First let's see whether private investors should be attracted to Granada Media shares when trading starts tomorrow morning.

Fuzzy television

Granada plans to place up to 20% of its media interests with institutional investors at a maximum price of 525p per share. If this is achieved the float will raise £1.5b for the newly separated company, valuing it at £7.5b. Last year this side of Granada's business made a £288m pre-tax profit on sales of £995m. Thus the new group is worth 26 times last year's net profits and 7.5 times historic sales. That is reasonable compared with competitors like fellow ITV broadcaster Carlton (LSE: CCM), which trades on a historic price to earnings ratio of 44.

But in many ways Granada Media is still a bit of a dinosaur in this arena. The media world is at a crossroads and this group resembles an old-style conglomerate. It tries to encompass all aspects of media creation, presentation, broadcast and delivery. Not only does the group make many programmes, it also owns an ITV franchise to broadcast them (as well as those made by other production companies). In addition the group has had to invest heavily in new media and digital enterprises, such as OnDigital (with Carlton). In addition it has a merchandising arm and most bizarrely runs a TV rental joint venture with Thorn!

ITV irritations

Naturally most interest will be paid in the future to digital developments and Granada's continuing programme production skill. For the moment though, much revenue comes from advertising broadcast via its ITV franchise. Granada wants to protect this fiercely and this float is a way of doing this. Last November's proposed merger of rivals Carlton and United News & Media (LSE: UNWS) really upset the cosy ITV applecart. Granada has subsequently said it wants to buy one or other or possibly both of the groups.

At the moment though under current UK legislation none these deals can progress. The broadcasters have provoked the Government regulators into action. Either they will change the rules and allow consolidation or else block all attempts at reform, leaving ITV to die a natural death, as advertising departs for digital destinations. This therefore is a fight for the death and Granada is convinced that only one of the three principal commercial terrestrial broadcasters will remain by 2002. The Department of Trade and Industry report into the matter is due out shortly.

Thus this fundraising is really a means of giving Granada cash to stave off attempts by its rival to control it. The group means to take control. However, the hospitality arm, encompassing Trusthouse and Meridien hotels as well as roadside services, will still control 80% of the shares until next year. This makes Granada Media paper less appealing to investors. Given this complicated ownership structure and the unresolved future of ITV broadcasting, private investors may do best to wait awhile and pick up a more focused media concern.

Where Next?

• Have your say on the Fool's Eye View discussion board, via the Resources section below
• Fool's Eye View on Granada's interim results
• Add to the traffic on the Granada discussion board
• Turn towards Compass's details