Blue Chip: Granada can still turn it on

Investors are cautious after the Forte takeover, but the leisure giant should resume normal service

Rival company directors peering at their unloved share prices this weekend must wonder what sort of Faustian deal Granada has done to get so much affection in the last six months. In that time Granada's share price has risen by 32 per cent, the company has talked up the success of its Forte acquisition, and its chairman, Gerry Robinson, has assumed the role of chief visionary and guru of British business, the exalted position once occupied by Sir John Harvey-Jones.

While all this initially cheered investors, they have recently become nervous over the company's high debt levels and the lack of obvious logic in combining hotels, restaurants and television. Only two months ago, the shares were looking to break the 900p barrier, but have since slid back to 838p.

For now, investor caution looks justified. Granada's short-term value hinges on its ability to sell off Forte's Exclusive hotel group, which includes Grosvenor House and Hyde Park Hotel in London, for the right price. In the long run, it depends more on how the company fares in the television market, particularly after digital television broadcasting begins next year, and how its newly acquired Little Chef roadside restaurants and Post House hotels respond to cost-cutting and aggressive marketing. While the latter is easier to predict, the fluidity of the television business means anything is possible, and anything less than Granada's full attention in this area could be damaging.

Until recently, the share price reflected the City's feeling that the Granada executive team of chairman Gerry Robinson and chief executive Charles Allen were a good bet to come out of any hotel sale negotiation on the winning side. Analysts even took comfort from the company's announcement at its interim results conference in June that it will delay the sale of the Exclusive Hotel chain until late in the year.

But investor jitters quickly emerged. First was the worry over whether the hotel industry, which emerged robustly from its lingering recessionary hangover last year, will continue to improve its occupancy rates and margins over the next six months. Granada said last month that occupancy rates at Forte's London hotels rose to 84 per cent in the first half of this year, a level not seen since before the recession. In addition, the company claimed there was little loss of business as a result of pushing up rates in its nationwide Travelodge and Forte Post House chains.

But if the profits cycle in British top-class hotels peaks towards the end of the year, the asking price for the Exclusive group, currently pitched at around pounds 850m, may have to fall. Much of the chain's value is locked up in the 595-room Grosvenor House in Park Lane, and any buyer of this property will have to take on some of the less attractive Exclusives (in particular, the underperforming Parisian hotels) to complete the deal.

The second concern surrounds the company's interest bill. The upside here is that Granada's television and electronics rental business and its Sutcliffe Catering operation between them generate enough cash to cover the estimated pounds 193m interest charge for 1996 on a total debt of pounds 3.5bn.

The downside is that a delayed sale of the Exclusive chain would not help the interest position, and might expose the company if the Bank of England succeeds in raising interest rates in the next few months. It would also be harder for the company to raise the pounds 550m or so it needs to fund a bid for the 75 per cent of Yorkshire Tyne Tees Television it does not already own after the Broadcasting Act - which will allow ITV companies to hold more than two licences - becomes law at the end of September.

The worst-case scenario is worth considering but it would be wrong to place too much faith in it. The signs are that Mr Robinson and Mr Allen can do advantageous deals, and are not so overawed by their strategic advisers that they will execute a rushed sale of the hotels into a maturing market followed quickly by a bid for Yorkshire Tyne Tees. They would like a clear run at YTT, and any bid while the hotels (and the pounds 3bn-plus of debt) remains on Granada's books will make investors nervous.

But while the short-term picture remains cloudy, the longer term looks brighter. Even with its debt, the company is in an enviable position. It has a dominant position in roadside restaurants and accommodation, two reliable cash generators in the Granada rentals business and Sutcliffe Catering, and a hotel portfolio that has plenty of scope to improve its margins.

Granada also has one of the youngest chairman-chief executive combinations in the FT-SE 100 index. Mr Robinson is 47, Mr Allen is 38. Both have been appointed to their current posts in the last year; neither will be thinking of leaving in a hurry.

The recent slide in the share price indicates that short-term investors, who bought on the strength of the good vibes put out by the company after the Forte takeover, should take this opportunity to sell. Those who place more value in the longer view should hold on.

Granada

Share price 838p

Prospective p/e 20*

Gross dividend yield 2%

Year to 31 Dec 1994 1995 1996* 1997*

Turnover pounds 2.1bn pounds 2.38bn pounds 3.84bn pounds 4.32bn Pre-tax profits pounds 265m pounds 351m pounds 454m pounds 670m

Earnings per share 32p 39.1p 39.3p 52.7p Dividend per share 10p 11.75p 13p 14.5p

*Merrill Lynch forecasts

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Are you passionate about sale...

Ashdown Group: Graduate Developer (Trainee) - City, London

£25000 per annum + benefits: Ashdown Group: A large financial services company...

Ashdown Group: Marketing Assistant - Financial Services Sector - London

£20400 per annum: Ashdown Group: An established and highly reputable organisat...

Recruitment Genius: Financial Services Graduate Training Scheme

£20000 - £100000 per annum: Recruitment Genius: We are a successful and establ...

Day In a Page

War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory
Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

Cook not the only one to be caught in The Oval mindwarp

Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

Can Benitez get the best out of Bale?

Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

Beijing witnesses new stage in the Jess and Kat rivalry

The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

Jeremy Corbyn interview: A shrewd operator desperate for power

His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

Isis executes Palmyra antiquities chief

Robert Fisk on the defender of the ancient city's past who was killed for protecting its future
Berlusconi's world of sleaze: The astonishing lifestyle once enjoyed by Italy's former PM

Berlusconi's world of sleaze

The astonishing lifestyle once enjoyed by Italy's former PM
Disney plans galactic domination with endless Star Wars spin-offs

Disney plans galactic domination with endless Star Wars spin-offs

Films and theme parks are just the beginning. Disney believes its control of the now decades-old franchise can bring in merchandise and marketing millions for years to come
Could the golden age of the gaming arcade ever be revived in the era of the Xbox?

Could gaming arcades be revived?

The days when coin-ops were the only way to play the latest video games are gone. But a small band of enthusiasts are keeping the button-pushing dream alive
Edinburgh Fringe 2015: The 'tampon tax' has inspired a new wave of female comedians to reclaim period jokes

Heard the one about menstruation?

Yes, if you have been at the Fringe, where period pieces are taking centre stage