Merger with Granada - Part 1
Compass Group PLC
17 May 2000
PART 1
Not for release, publication or distribution in or into the USA, Canada,
Australia or Japan
Merger of Granada and Compass Group
Creation of Independent Focused Media and Hospitality Groups
* The Boards of Granada and Compass Group announce that they have agreed the
terms of a merger to be followed by a demerger to create two focused world
class groups:
- one of the world's leading hospitality businesses, comprising Compass
Group's existing businesses and Granada's hospitality division ('Compass
Hospitality'); and
- a major independent media group, based upon Granada's existing media
division, called Granada Media.
* It is intended that the proposals will be implemented in two stages:
- a merger between Granada and Compass Group to form Granada Compass; and
then
- the separation of Compass Hospitality and Granada Media within 12 months
by means of a demerger.
* Following the Merger, holders of Granada securities will receive
approximately 66.25 per cent. and holders of Compass Group securities
approximately 33.75 per cent. of the fully diluted ordinary share capital
of Granada Compass. The pro forma market capitalisation of the combined
group is £17.5 billion on a fully diluted basis.
* In connection with the Proposals, it is expected that there will be a
partial IPO of Granada Media this summer.
* Compass Hospitality will be a world class hospitality group with turnover
in excess of £7.5 billion and leading market positions in foodservice,
travel-related catering and hotels. The Directors of Granada and Compass
Group expect that the combined business will be better placed to exploit
the significant growth opportunities in each of its core markets and to
benefit from the combination of its complementary businesses.
* An independent Granada Media will be well positioned to take advantage of
the rapid changes in the converging global media market as it moves into
the broadband world and to enhance its market leading position through
further consolidation. Regarding the domestic market, Granada will make a
final decision as to whether to bid for Carlton Communications or United
News & Media (or for neither) when the outcome of the formal regulatory
review process is known.
* The Directors of Granada and Compass Group estimate that the Merger will
generate operating cost synergies and other cost savings excluding revenue
benefits within Compass Hospitality of at least £70 million per annum by
the third year of trading following completion of the Merger.
* During the period prior to the Demerger, the Board of Granada Compass will
comprise an equal number of Granada and Compass Group directors.
Gerry Robinson, Chairman of Granada, said:
'This is exactly the right deal for us. It puts into effect the demerger
that we have long believed right. Furthermore, it does it in a way that
gives our hospitality and media businesses the scale and opportunity to go
from strength to strength as separate groups. We could not have found a
better partner for our hospitality business. Together with the demerger,
this will create real value for our shareholders.'
Francis Mackay, Executive Chairman of Compass Group, said:
'Today's announcement transforms the nature of our industry. It creates in
Compass Hospitality a business with a turnover in excess of £7.5 billion - a
leading global hospitality group and a major force in a market that offers
significant potential for future growth. The combination of the hotels and
foodservice businesses will be a key advantage in our future successful
development.'
Charles Allen, Chief Executive of Granada, said:
'Granada Media is incredibly well placed to benefit from the changes taking
place in the global media market. We have a clear strategy to grow our
production and broadcasting businesses, to be a key player in Pay-TV and a
leading player in broadband and interactive media. The IPO gives investors
the opportunity to benefit from a pure media company and will enable Granada
to demonstrate the hidden value in our business.'
Michael Bailey, Chief Executive of Compass Group, said:
'Our business is all about having the right brands for our clients and the
right people to deliver the service. Together the businesses of Compass
Hospitality have some of the strongest brands in our industry and a wealth of
knowledge as to how to use these to achieve client and customer satisfaction.
Working together we will drive enhanced shareholder value.'
The Merger is pre-conditional upon the arrangement of appropriate financing.
The Merger will be conditional, inter alia, upon shareholder approval and
European Union competition clearance.
Meetings
The following presentations for analysts and the press are being held today
at Cinema 1, Barbican Centre, Silk Street, London EC2Y 8DF:
10.00 a.m. Analysts presentation
11.30 a.m. Press photo call
11.45 a.m. Press presentation
Interim results
Simultaneously with the issue of this announcement each of Granada and
Compass Group have released their respective interim results.
Enquiries
Granada Group PLC Compass Group PLC
Gerry Robinson Francis Mackay
Charles Allen Michael Bailey
Henry Staunton Andrew Lynch
020 7451 3000 01932 573 000
Lazard Schroder Salomon Smith Barney
John Dear Robert Swannell
Nicholas Shott David Wormsley
Robert Constant Simon Lindsay
020 7588 2721 020 7658 6000
Citigate Dewe Rogerson Hudson Sandler Ltd
Jonathan Clare Michael Sandler
Simon Rigby Nick Lyon
Chris Barrie Wendy Baker
Alex Brown 020 7796 4133
020 7638 9571
Hoare Govett Limited and Credit Suisse First Boston are acting as corporate
brokers to Granada. Merrill Lynch International and HSBC are acting as
corporate brokers to Compass Group. Lazard, ABN Amro Hoare Govett and Credit
Suisse First Boston are acting as joint global co-ordinators to the IPO.
Lazard Brothers & Co., Limited ('Lazard'), which is regulated in the United
Kingdom by The Securities and Futures Authority, is acting for Granada and no
one else in connection with the Merger and will not be responsible to anyone
other than Granada for providing the protections afforded to customers of
Lazard, or for providing advice in relation to the Merger. Salomon Brothers
International Limited ('Schroder Salomon Smith Barney'), which is regulated
in the United Kingdom by The Securities and Futures Authority, is acting for
Compass Group and no one else in connection with the Merger and will not be
responsible to anyone other than Compass Group for providing the protections
afforded to customers of Schroder Salomon Smith Barney, or for providing
advice in relation to the Merger.
No offer or invitation to acquire or exchange securities in Granada or
Compass Group is being made now. Any such offer or invitation will only be
made in documents to be published in due course and any such exchange should
be made solely on the basis of information contained in such documents.
Nothing in this section should be construed as a profit forecast or be
interpreted to mean that the future earnings per share of Granada Compass
will necessarily be the same as, or greater than, the pro forma earnings per
share for completed financial periods.
Neither this announcement nor any statements made in this document relating
to future actions of Granada, Compass Group, Granada Media or Compass
Hospitality constitutes an offer of securities for sale in the United States.
The securities referred to herein have not been and will not be registered
under the US Securities Act of 1933, as amended, and may not be offered or
sold without registration thereunder or pursuant to an available exemption
therefrom.
For immediate release 17 May 2000
Not for release, publication or distribution in or into the USA, Canada,
Australia or Japan
Merger of Granada and Compass Group
Creation of Independent Focused Media and Hospitality Groups
1. Introduction
The Boards of Granada and Compass Group announce that they have agreed the
terms of a merger to be followed by a demerger to create two focused world
class groups:
* one of the world's leading hospitality groups, comprising Compass Group's
existing businesses and Granada's hospitality division ('Compass
Hospitality'); and
* a major independent media group, based upon Granada's existing media
division, called Granada Media.
It is intended that the proposals will be implemented in two stages,
commencing with a merger between Granada and Compass Group to form Granada
Compass (the 'Merger'). Then, within the 12 months following completion of
the Merger, the enlarged hospitality group will be separated from the media
group by means of a demerger (the 'Demerger') (together the 'Proposals').
Following the Merger, holders of Granada securities will receive
approximately 66.25 per cent. and holders of Compass Group securities
approximately 33.75 per cent. of the fully diluted ordinary share capital of
Granada Compass. The pro forma market capitalisation of the combined group
is £17.5 billion on a fully diluted basis.
In connection with the Proposals, it is intended to proceed with a public
offering of a minority stake in, and to seek a listing on the London Stock
Exchange for, Granada Media (the 'IPO'). This will give investors the
opportunity to focus on the value of a separately listed media company in
advance of the planned Demerger. In addition to crystallising a value for
Granada Media, the IPO will raise funds which will be used to fund Granada
Media's expansion plans.
The marketing of the IPO is expected to commence at the end of June, with
pricing in the first half of July, subject to market conditions. Full
details of the IPO, including an indicative valuation range, are expected to
be available towards the end of June.
2. Background to and reasons for the Proposals
The Boards of Granada and Compass Group believe that the Proposals offer a
unique and exciting opportunity to create a world leading hospitality group
and a substantial, independent media company. Following the Demerger,
Compass Hospitality and Granada Media will each be well positioned to be at
the forefront of global consolidation and convergence in their respective
industries. The Boards of Granada and Compass Group believe that these
Proposals will significantly enhance value for their shareholders.
2.1 Compass Hospitality
The business
Compass Hospitality will be a leading player in the global hospitality
market. In the year ended 30 September 1999 the businesses that will
comprise Compass Hospitality generated profit before interest, tax and
goodwill amortisation of £914 million on turnover of £7,539 million (as
extracted from the annual report and accounts of Granada and Compass Group).
Compass Hospitality will have three major divisions:
Contract foodservice (£4,775 million of turnover for the year ended 30
September 1999)
The new contract foodservice business will be the global leader in a large
and growing market where the ability to offer an international service is
increasingly important. The business will employ over 200,000 people
throughout North America, Africa, South America, Asia, Europe and Australasia
with positions in the top three of most of the world's largest foodservice
markets, including the USA, the UK, Germany and France.
Within the UK market, the addition of Sutcliffe to Compass Group's existing
activities will provide Compass Hospitality with a stronger base to drive the
penetration of out-sourced catering within the £5.5 billion foodservice
market, particularly in the key sectors of healthcare and education.
Concessions (£1,794 million of turnover for the year ended 30 September 1999)
Compass Hospitality will have a major presence in the branded foodservice
business in Europe and worldwide. Select Service Partner (SSP), Compass
Group's concessions business, is the European market leader in airport
restaurant foodservice with an extensive range of owned and franchised
branded food concepts. The company also has a range of businesses in other
concession locations - including railway stations, European motorway service
areas (MSAs), stadia, shopping and leisure locations. The Boards of Granada
and Compass Group believe that these businesses will be greatly enhanced by
the addition of Granada's leading UK MSA and roadside businesses.
Hotels (£970 million of turnover for the year ended 30 September 1999)
In total, Compass Hospitality will operate over 58,000 rooms in over 50
countries worldwide (including Travelodge which will be accounted for and
managed within the Concessions division). The Hotels division is the leading
UK hotel chain, with a rapidly expanding position in international markets.
The Meridien chain has doubled its number of hotels over the past five years,
particularly with expansion of management contracts.
Over the last two years, Granada's hotel business has been focused into four
core brands, each of which is targeted at the needs of specific consumers: Le
Meridien, Posthouse, Heritage and Travelodge. This has enabled Granada to
serve customers across a broad range of markets, supported by common
reservation and administrative systems.
Benefits of the combination
The Boards of Granada and Compass Group believe that the combined strengths
of Compass Hospitality's businesses will provide significant new growth and
margin improvement opportunities in key markets in addition to substantial
cost-saving opportunities arising as a result of the combination itself.
New growth and margin improvement opportunities
Opportunities for growth and margin improvement include:
* combination of two leading management teams;
* leveraging the foodservice brand portfolio;
* strengthening its position in key UK foodservice growth sectors;
* international growth in core business areas; and
* exploiting the combination between foodservice and hotels.
Combination of two leading management teams
Compass Hospitality will bring together two well-regarded management teams
with a track record of delivering growth at the top and bottom lines.
Compass Group's management has focused over the last eight years on the
development of an international business based around sector-focused
operations and Compass Hospitality will be able to leverage that investment
for growth across the whole of its business. Sales growth for Compass Group
over the last five years has averaged 39 per cent. per annum. Margins have
shown consistent like-for-like growth.
Granada's management has achieved some of the highest margins in the
hospitality industry. Since the Forte acquisition, the management has
delivered an average 10 per cent. growth in hospitality margins per annum.
Foodservice branding opportunity
In a consolidating hospitality market, the Directors of Granada and Compass
Group believe that brands are key to future success.
Both companies have built a strong brand presence through acquisitions and
development of their own brands, such as Upper Crust, Little Chef, Harry
Ramsden's and Ritazza, as well as by franchising major 'external' brands such
as Burger King. The selective introduction of brands has been a key
influence in raising levels of penetration and spend per head and therefore
turnover in foodservice locations. Compass Hospitality will deliver a wider
range of international foodservice brands to the hotels division where
appropriate to the customer base.
Compass Hospitality will have a network of some 20,000 locations but as yet
only some 10 per cent. of these are using the major brands of its total
portfolio. The Boards of Granada and Compass Group believe that the brand
development plan will enhance growth, retention and margin opportunities.
Strengthened UK presence
Compass Hospitality will operate in a major and growing marketplace in which
the sectors offering the strongest growth opportunities continue to be those
with the highest levels of self operation - i.e. healthcare and education.
The market size in the UK of these two sectors alone is in excess of £3.5
billion and in both of these sectors Compass Hospitality will be market
leader with a solid national presence.
Sector growth internationally
Compass Group has established a major international foodservice business with
a presence in some 75 countries worldwide.
In concessions, Compass Group is the European market leader, primarily
through its subsidiary SSP which has high profile businesses in the airport
restaurants and railway station market sectors. Granada Hospitality's strong
presence in the MSA and Little Chef roadside business in the UK will
complement this profile and strengthen the ability of Compass Hospitality to
enhance its leadership position.
Compass Hospitality's hotel business will include 121 Le Meridien hotels
located in some 50 countries. The hotels will bring high profile locations
to the Group in major and development territories, enhancing Compass
Hospitality's profile in these markets. Compass Group's strong business base,
particularly in Australasia, Latin America and Africa, should provide
additional infrastructure and contacts to increase the number of managed
hotels in these regions.
Benefits between foodservice and hotels
Food and beverage revenues represent approximately 40 per cent. of the hotel
division's turnover of £970 million.
Compass Group, which includes Roux Fine Dining and high profile restaurant
subsidiaries such as Restaurant Associates in the US, will ensure greater
focus on maximising revenues through the restaurants and related foodservice
offerings in the hotels business. For example, the high quality hotels
within the Heritage brand will provide a showcase for the culinary and
service skills of Compass Hospitality. Within these 47 hotels, food and
beverage income represents over 50 per cent. of sales.
The Posthouse brand with 75 sites provides a combined restaurant, hotel and
conference offering targeted mainly at the business community. The Directors
of Granada and Compass Group expect benefits to arise from the cross-
marketing of hotel and catering services to corporate customers as well as
the combination with Compass Group's events marketing activities.
Synergies
The Boards of Granada and Compass Group estimate that operating cost savings,
excluding the benefits of cross-selling and other revenue enhancing
opportunities, amounting to at least £70 million per annum will be achieved
by the third year of trading following completion of the Merger.
The combination of Granada Hospitality and Compass Group brings scope for a
significant reduction in Compass Hospitality's cost base, particularly in
food and beverage purchasing.
Cost savings in purchasing will arise from the harmonisation of supplier
terms and through increased discounts for bulk purchasing across the
hospitality sector, as well as the implementation of best practice. The
Directors of Granada and Compass Group believe that there is also significant
opportunity to harness new on-line and e-commerce developments to promote
further efficiency.
The purchasing power of Compass Hospitality is expected to be in excess of
£2.7 billion per annum.
In addition, there exists, in certain areas, a duplication of systems,
property and cost centres where a combination will provide a more effective
platform of administration to support the faster growth of the business.
The cash costs of achieving these synergies is expected to be approximately
£65 million. These costs will be treated as exceptional items.
The expected cost savings have been calculated on the basis of the existing
cost and operating structures of Granada and Compass Group, on current
volumes and by reference to current prices and exchange rates, and the
current regulatory and economic environment.
Nothing in this section should be construed as a profit forecast or be
interpreted to mean that the future earnings per share of Granada Compass
will necessarily be the same as, or greater than, the pro forma earnings per
share for completed financial periods.
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