FORTE

n What's the big row with Granada all about? n Who will benefit, depending on the outcome? n What's going to happen to our motorway breakfast?
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The Independent Online
What's all the fuss about Forte?

Granada Group is offering pounds 3.8bn to take it over. Forte's management is fighting the bid. Forte's shareholders have to decide by Tuesday week whether to accept or reject it. City experts say the battle looks like going Granada's way.

What is Forte?

It's Britain's biggest hotel and restaurant business. It owns the Happy Eater and Little Chef roadside restaurants chain, Meridien and Posthouse hotels, and the Welcome Break motorway service stations. It also has a stake in the upmarket Savoy hotel group. It is run by Sir Rocco Forte, son of Lord Forte, the Italian immigrant who founded the business as a milk bar in London's Regent Street.

And Granada?

It is best known for Granada TV, the North-west ITV franchisewhich produces Coronation Street. It also owns London Weekend Television, a stake in BSkyB television, a string of high-street TV rental outlets, its own motorway services, and a large contract-catering operation. Its chief executive is Gerry Robinson, an Irishman. John Cleese condemned him as an "ignorant upstart caterer" when he was appointed to run Granada and sacked its then TV chief, David Plowright, but the two later lunched together.

Why does Granada want Forte?

It reckons it can make itself more profitable by using its catering expertise to improve the performance of the Forte restaurants and mid- market and budget hotels.

Who will decide?

Forte's 70,000 shareholders. In fact, Forte's fate, like every other company's, rests with a few dozen institutional shareholders - the big pension funds and insurance companies. One fund manager alone, Mercury Asset Management, controls15 per cent of Forte and spent last week buying even more shares.

The Council of Forte, a charity established in 1904 to promote temperance, owns 50 per cent of the voting rights. But it has agreed that, of ordinary shareholders sell out, it too will sell to Granada for pounds 50m.

Why would shareholders sell out?

For the money. After raising its bid last week Granada is offering 362p per Forte share in cash (well above the 260p stock- market price before the bid) or an alternative higher offer in Granada shares. Forte's long- run track record has been dismal in producing decent returns - dividends and capital gains - for shareholders: pounds 100 invested in Forte five years ago would now be worth a measly pounds 130; pounds 100 invested in Granada would now be worth pounds 544.

What would make them back Forte?

If Sir Rocco offers them what looks like a better deal. He has promised to raise the dividend by 20 per cent in each of the next three years and to distribute the Savoy shares directly to the Forte shareholders. He also plans to buy many of the shares in his own company (known as a "share buyback") which would reduce the number of shares in issue and, therefore, potentially boost the share price.

How can either side afford to throw all this money at shareholders?

They can't. Robinson will have to borrow up to pounds 2.5bn to pay for Forte. But he believes that, by selling off the Exclusive and Meridien hotel chains, the Welcome Breaks and the Savoy shares, he can cut the debt quickly enough to make the deal pay for itself.

And Sir Rocco?

He has agreed with Whitbread that, if Granada is seen off, he will sell them the Little Chefs, Happy Eaters, Welcome Breaks and Travelodges for pounds 1.05bn. This will give him enough cash for his share buyback.

Isn't this called asset stripping?

Yes, although neither side calls it that . Both talk about the need to concentrate on their core areas of expertise.

Will it work?

That's what the shareholders have to judge. Forte's share buyback, for example, is a sort of conjuring trick. The price of Forte shares will rise because fewer people hold them, not because of any increase in the value of the company. Some shareholders may reckon that, with fewer assets, Forte's value will go down. Others may think it will make higher profits if it concentrates on fewer areas.

Has Sir Rocco got into this fix because he has been a bad manager?

If the share price performance is anything to go by, yes. But his supporters say it is only in the past couple of years that he has thrown off his father's shadow and in that time he has knocked Forte into better shape. Robinson, they claim, is trying to cash in on the groundwork already done. Robinson, however, argues that Forte has managed its assets badly and has too many luxuries such as its corporate jet and sponsorship of the Prix de l'Arc de Triomphe horse race.

Are the roadside breakfasts safe?

No. Granada has installed Burger King franchises in its motorway service stations and would do the same with some of the Little Chefs and Happy Eaters, either converting them wholesale into fast-food outlets, or at least tacking on a fast-food counter.

So is anybody benefiting from this takeover battle?

Yes. The merchant bankers, underwriters, lawyers, spin-doctors and other advisers will collect over pounds 130m in fees. Forte shareholders should do well if they play their cards right. But nobody is thinking much about customers. Indeed, neither side has spent mcu time on running their companies since the bid was launched. If Granada wins, however, guests of the Posthouse hotels can look forward to Sky TV in every room.

So are bids a Good Thing or a Bad Thing?

More often than not, a Bad Thing, say most academic studies. Shareholders of the target company do well, but those of the predator tend not to. When predator and prey are of similar size, as in this case, the chances of success are further reduced. But the vague threat of a hostile bid is seen as a Good Thing, keeping otherwise sleepy managements on their toes.

By Patrick Hosking

Photograph by Universal Pictorial Press

Business News, page 3

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