Gerry Robinson, chief executive of Granada who considered buying Sutcliffe when he was at Compass, the UK's second largest contract caterer, said: 'We identified this area as part of a strategic review at a board meeting six months ago.'
Granada first approached P&O, the shipping and construction group, soon after Mr Robinson was brought in 17 months ago to fill the void created by the resignation of Derek Lewis in May 1991.
Yesterday's deal only became live about six weeks ago, but there was some confusion as to which side initiated the negotiations. 'They came back to us,' said Mr Robinson, while Lord Sterling, chairman of P&O, claimed that 'they got in touch with us within the last two months'.
Management at Sutcliffe, 60 per cent of whose business is in contract catering, will report directly to Mr Robinson.
'Sutcliffe provides an excellent base for further profit growth and subsequent expansion. Significant purchasing synergies can also be achieved with the catering activities of Granada's motorway and hospitality businesses,' he said.
Other reasons for making the acquisition were because 'it balances Granada' he added. Nearly 60 per cent of Granada's profits last year came from television rental, which the company said would have been 50 per cent if Sutcliffe was included.
Sutcliffe, the catering business, is the UK's third biggest, ranking behind Compass and Gardner Merchant, the market leader recently bought out by management from Forte.
In 1992 Sutcliffe's catering side alone made profits of pounds 15m, before interest charges, from pounds 358m of sales. Its vending services made pounds 2m profits, Spring Grove made pounds 11m and pounds 1m was generated by other operations in security services and office cleaning.
The purchase, which includes the Spring Grove linen and workwear business, found favour among City followers of Granada, and accompanied P&O's announcement of a 16 per cent profits increase for 1992.
Some stockbroking analysts have been expecting Granada to buy a cash- generative business to broaden its revenue spread. Granada, which is funding the deal through the issue of 42 million shares and pounds 211m of borrowings, said Sutcliffe would not dilute earnings per share this year 'even if we do nothing to the business'.
Bruce Jones, an analyst at the Smith New Court broking house, said the acquisition was particularly attractive for Granada because it is 'a business they understand.'
He has increased his profit projections for Granada's financial year to this September from pounds 156m to pounds 163m and from pounds 180m to pounds 207m for 1993/94. Granada's shares rose 20p to 385p yesterday, while P&O gained 2p to 603p.
Institutional investors also reacted favourably, lapping up the issue of 42 million shares in less than 30 minutes. The share placing, the largest for a year, was handled by Hoare Govett.
Including the pounds 27m operating profits from the Sutcliffe and Spring Grove businesses, P&O last year increased profits from pounds 233m to pounds 270m before tax.
The results would have been pounds 43m higher if not for the change in accounting rules. The main difference is a pounds 60.2m profit on the sale of part of Modern Terminals in Hong Kong.
The company has written down its property portfolio, boosted by the acquisition with Chelsfield of Laing Properties in 1990, by pounds 142m to pounds 1.7bn. Lord Sterling said the 8 per cent write- down was less than the average.
The dividend is unchanged at 30.5p. Lord Sterling said the 'medium and long-term trading prospects' determined dividend policy. Earnings per share fell from 35.2p to 32.9p a share reflecting the extra shares issued in a 1991 rights issue.
Profits from ferries rose by 19 per cent to pounds 153m but containers and bulk shipping were unchanged at pounds 36.2m. The company hopes the latter will benefit from sterling's devaluation.
Housebuilding, construction and development made a loss of pounds 39.8m but investment property contributed pounds 90.9m. The company has started work on a second major property development in Germany - a 1m sq ft shopping centre near Dusseldorf.
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