Robinson's Granada decides against demerger
On why granada has ruled out a demerger
Saturday 11 October 1997
Nothing is ever perfect in business, however, and after a spectacular run, the share price has been underperforming these past six months. In part this is because the pace of hotel disposals has been much slower than was promised at the time of the Forte takeover. Some hotels that were ear marked for sale, might now be kept.
But it is also to do with a lingering concern over where Granada is heading. Nobody can quarrel with performance, which since Gerry Robinson moved into the hot seat in the early 1990s, has been spectacular. Rather it is to do with the shape of the company. Granada is essentially a conglomerate of three parts - its hotel, catering and motorway service station interests, its TV rental interests, and its glamour TV and media companies. Conglomerates are unfashionable these days and if the City has been prepared to turn a blind eye to the conglomerated nature of Granada thus far, nothing is for ever.
Focus and consolidate; these are the two great corporate mantras of the age. If they were followed at Granada, the group would be breaking itself up into at least two and possibly three parts.
So could the October strategy meeting bring news of a demerger? The bankers and lawyers who make money out of these things will be disappointed to learn this, but there is virtually no possibility of it. Executives have studied the arguments and pressures for it, and concluded that no benefit would be derived from going down that route. The decision has yet to be taken formally, but effectively it has already been ruled out for the foreseeable future. Should shareholders be concerned about this disregard for fashion, or can Mr Robinson justify his oddball combination of businesses?
The Granada chairman is so much admired and well liked in the City that nobody is seriously going to challenge his decision. Even so, some fund managers will feel uncomfortable with the situation. Few believe any longer in the old Hanson philosophy, that it is possible to apply with success a common set of management skills across a range of diverse businesses. To the extent that this worked in the past, it was achieved by imposing rigid controls and targets across the group, pretty much regardless of the needs and long term health of its individual parts.
In today's more competitive and globalised markets, this is generally considered a crude and wholly inappropriate approach. Maintaining competitiveness in today's environment requires managers to be highly sensitive to the long term needs of their businesses, and to have a perfect understanding of the markets in which they operate. Plainly a group that is run across a range of industries according to a book of numbers cannot hope to achieve that.
Fund managers have also begun to demand more clarity from companies than can ever be achieved in a conglomerate, where it is often possible to hide the poor performance of one part of the group behind the buoyant performance of another. If there are decisions to be made about which sectors to invest in, it should be the fund manager who is making them, not the corporate executive, who by and large should be sticking to his knitting. That's the general view, in any case.
All of which rather begs the question of why the City was prepared to back Granada in its bid for Forte when only a couple of years previously the target had been LWT. Beyond a TV in every hotel bedroom, the two businesses could hardly be more unrelated. As it has lost faith, then, with the old conglomerates of the 1980s - Hanson, BTR, BAT Industries - the City seems only too happy to support the creation of another.
To some extent, this is explained by the old adage of what goes round comes round. By the time they begun the process of breaking themselves up, both Hanson and BTR were past their sell by date, mature businesses in mature industries, some of them so unrelentingly run for cash over the previous decade that they were all but dead and buried.
Granada, by contrast, is in two of Britain's fastest growing industries, media and leisure, and so far it has not been possible to fault the way it has run either. Forte is turning into a veritable gold mine, while the group's successful bid for digital terrestrial and its continued interest in BSkyB is transforming its media interests into some of the most valuable in the country.
On the "if it ain't broke, why mend it" philosophy alone, then, there is little case for demerging Granada. There is also plainly a considerable benefit to Granada in size for the sake of it. Without LWT, it would not have been large enough to do Forte. Without the critical mass Granada now processes in both these industries, a whole range of higher risk investment and business opportunities would be closed off. Furthermore, it is not at all clear that demerger of itself does create shareholder value. The performance of Thorn EMI has been little short of disastrous since TV rental was separated from music.
Consistency never was the investment community's strong point. Even as the old style conglomerate has lost its allure, there are certain other types of conglomerate, notably media conglomerates like Lord Hollick's United News and Media, which have become highly fashionable. A conglomerate like Granada would seem to be right on the cusp of the City's tolerance level, but while it continues to pile on value both in media and leisure at the present rate of knots, nobody is in a position to complain.
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