View from City Road: Granada ahead on points

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The Independent Online
There is a definite sense of deja vu for Gerry Robinson, chief executive of Granada, behind the purchase of the Sutcliffe catering and Spring Grove laundry contracting businesses. He did consider buying Sutcliffe when he fronted Compass, the company he also took very close to buying Sketchley.

While yesterday's deal is good for P&O, Granada comes out slightly ahead on points. Sutcliffe's profit margins of 4.2 per cent on annual sales of pounds 358m are less than half the 10 per cent attained by Compass, making the exit multiple of 18 times earnings on the whole deal look less heady.

Spring Grove has margins of nearly 13 per cent on sales of pounds 85m.

The big negative is that Granada's gearing will soar from last year's 39 per cent to around 80 per cent. That figure, however, should fall to less than 50 per cent next year, as Granada harnesses the strong operating cash flow of Sutcliffe and Spring Grove, respectively pounds 13.4m and pounds 7.1m in 1992.

The deal also marks a slight shift in Granada's strategic direction. The company's TV rental business, which has for so long been the provider of the lion's share of profits, will see its pre-purchase contribution fall from 59 per cent of the total to 50 per cent, and below that by the end of this year.

A big plus for shareholders is that there will be no earnings dilution. The effect in the current year to September will be slightly positive, lifting analysts' projections for earnings per share from 22.7p to 23p and for 1993/94 from 26.3p to 28.7p.

The respective p/e multiples of 16.7 and 13.4 make Granada shares, up 20p yesterday to 385p, look safe to bank.

As for P&O, the disposal smacks of a balance sheet strengthening exercise, notwithstanding the company's protestations. Having already exhausted the rights option in 1991 but not yet being able to sell significant amounts of its pounds 1.7bn property portfolio, P&O had few choices in raising cash.

Gearing at the year end was 84 per cent, which looks high given the extra working capital required of a transport business in an upturn. Ironically, it is not much higher than Granada's new level of borrowings.

The deal reduces that ratio to just 60 per cent, which should be manageable.

That assumes no further write- downs are required. Last year P&O reduced the value of its portfolio by 8 per cent, following a 4 per cent cut in 1991. And it reduced the value of its housing land bank by pounds 30m to about pounds 25,000 a plot.

Buoyed by recovery hopes, P&O's shares have outperformed by 45 per cent in the last six months and may now pause for breath. The yield of 6.3 per cent provides support.