Match of the day?

On the day the proposed merger of hospitality giants Compass and Granada was leaked to the press, the Compass share price plummeted by an unprecedented 15%. The only purely food service company on the FTSE 100 was being reprimanded by the City.

Executive chairman Francis Mackay, Granada chairman Gerry Robinson and chief executive Charles Allen, all of whom had worked together as part of the 1987 Compass buyout from Grand Metropolitan, were caught unawares. They had no chance to put their own spin on the £18b merger which would create the UK's number-one food service player.

City cynics

The City had made up its mind: big was not necessarily beautiful and, in the case of Compass, a pure catering company - one that had set a trend in global contracts, achieved enviable profit margins in excess of 7% and brought high-street brands to the staff feeding arena - had been complicated by add-ons such as hotels and motorway service areas.

The news threw into disarray a sector that should have been well used to such liaisons. Over the past few years Baxter & Platts, Summit Catering, High Table, Brian Smith and latterly Nelson Hind, to name a few, had been sucked into the bigger picture. They left in their wake an industry dominated by just five key players: Sodexho, Granada, Compass, Aramark and Elior UK. Now that figure has shrunk further.

It seems that not everyone shares Granada and Compass's faith in the benefits of working on a global scale, though. Although globalisation can be a lucrative move, with cost-efficiencies and clout generated through internationally appealing brands, it can be a risky strategy. Those same centralised systems can jeopardise the customised service that individual clients expect. Add to that the internal problems of integrating cultures and anxieties over job security, and what appears to be a good idea at the outset can result in disquiet and low productivity.

The two parties in question are, unsurprisingly, showing a unified front against any negative feeling. Frank Whittaker, Granada Restaurants' sales and marketing director, says the deal makes a lot of sense in a market which has seen plenty of mergers and acquisitions, and in which clients have become more demanding, necessitating more resources. "There's a greater requirement for us to take a risk in fixed-price contracts, for example," he says.

Bill Vickers, Compass's director of marketing services, points out that the shareholders voted to accept the merger, adding: "The results of the shareholders' meeting show it is a good deal."

There's little doubt that the food service side of Granada will see benefits, gaining the chance to tap into Compass's expertise across 75 countries. But Vickers stresses it works both ways. Far from Compass muddying its food service business, he says the company wants to diversify and will benefit from Granada's Motorway Service Areas and hotels portfolios. "It's a nice fit for us, and culturally we are very similar. It's a fantastic opportunity. We'll be a force to be reckoned with."

"We'll be active in every sector except high-street restaurants," adds Whittaker, who claims neither culture will dominate, rather they will be taking the best from each other.

As for logistical details, however, not even the HQ location had been decided as Caterer went to press. It is known that the merger will create two separate companies to be called Compass Hospitality and Granada Media (see panel). And although job losses will be inevitable, Whittaker cannot say how many, simply that that will not be at a level that will impact on the client or customer.

Clients have been their main concern, says Whittaker, and have been informed of the merger through letters and telephone calls. Most, he says, understand because mergers are now part of their world, too.

Whittaker says the plan is to synergise quickly, although he envisages the communication process lasting at least another nine months.

He denies that their eye will be off the ball during this time. Only three people from each company will work on the synergy, otherwise it's business as usual.

But he concedes that the merger changes the dynamics of doing business. "It's strange. One minute we are ripping each other's throats out, the next we are friends."

Not all outsiders share the confidence of those on the inside. Contract catering veteran Garry Hawkes spent 37 years at Gardner Merchant, snapping up small companies along the way, and engineering a management buyout in 1993 and an alliance with Sodexho in 1995. He feels strongly that although a certain amount of globalisation is inevitable, it has to be handled carefully or risk brand dilution.

"When people want food service, they want attention to detail. You may have global clout, but it cuts no ice if the grub is lousy," he says. Hawkes believes there is a natural life span for all organisations - mergers included. "All organisations have a birth, grow and then die or join forces. Sometimes they have a reincarnation, as the return of William Baxter shows [Caterer, 18 May, page 6]. Good luck to them. If I were 25 years younger I would do the same."

Bill Toner, chief executive of Aramark UK, believes shareholder value can dominate big deals, with repercussions on issues such as recruitment. "I just hope that when these big organisations merge they put something back into the business," he says. "It's already difficult finding the right people for the job. If everything is sucked up by the shareholders' dividend then there will be no reinvestment and no emphasis on training."

For the smaller players, the Compass/ Granada marriage means one less competitor and more chance to play on the "small means greater attention to detail" pitch. Both William Baxter, who has just founded BaxterSmith, and Tim West, chief executive of Elior UK, subscribe to this view.

"Overall, it's good news for us because it takes another player out of the market," says West. "Although organisations are better collectively, even if they function at only three-quarters of their combined power," he concludes.

Baxter says the Compass/Granada deal will make it easier for his new firm to win business. "There's a huge opportunity at the moment. The large companies have had it their own way for a long time."

But how does a giant such as Sodexho view being knocked off its spot as the largest contract caterer in the UK? David Ford, Sodexho's chief executive in the UK and Ireland, is ambivalent: "It means we have only one [large] rival and Sodexho is still number one in the world."

Synergy doubts

Sodexho's founder and chief executive officer Pierre Bellon is simply bewildered by the merger. "We have read analysts' reports and there are different interpretations of the deal," he says. "Some people say it's not good for Compass, but it is too early. In our business, why put together catering and hotel management? I don't see the synergy between the businesses. We are a pure player [in food service] and don't want to diversify."

Many analysts share Bellon's view. "Hotels and contract catering are like oil and water. Putting more variables into the equation forces the market to do more work," says one.

Another gives the deal a "pretty negative" response, saying that the reason for buying into Compass was because it was a caterer. "The deal is all about Granada Media and came about because of the personalities involved," he says. "It may be that we are missing something, but [Compass] has lost a lot of credibility."

Posthouse sell-off

Even so, most commentators concur that Compass Hospitality's pledge to dispose of the unloved 81-strong Posthouse chain gives the right signal. Francis Mackay has gone on the record to say the portfolio does not fit into the group's long-term strategy and reports suggest it will be put up for sale within the next 18-24 months with a price tag of £1b (The Caterer /22 May 2000). The group is expected to hold on to the rest of its hotel portfolio.

There's no way of telling at this stage how the merger will pan out. Most observers agree that such a deal could not have happened were it not for the trust between Robinson and Mackay, and that it will take a while for the details to be ironed out. And cynics add that one reason Compass shareholders voted for the deal was to avoid a deflation of the market that can occur when companies don't merge following an intention to do so.

But while the jury is still be out on the long-term merits, one thing is certain. For every merger, someone, somewhere, is setting up in a back room with the eventual hope of being snapped up, just like Compass.

Compass Group Plc

Francis Mackay helped mastermind the Compass management buyout from Grand Metropolitan in 1987. Sales grew from £250m with 20,000 employees in two countries in 1991, to nearly £5b with 190,000 employees in 75 countries today.

Portfolio

• Business and industry

Eurest

• Healthcare

Medirest and Bateman

• Education

Chartwells and Scholarest

• Fine Dining

Roux Fine Dining and Flik

• Vending

Canteen Vending Services

• Travel, shopping, leisure & concession catering

Select Service Partner (SSP)

• Sports, social and leisure events

Letheby & Christopher, Payne & Gunter, Leith's

Granada Restaurants

Granada entered the contract catering arena in 1993 with the acquisition of Sutcliffe Catering from P&Q.

Turnover: £1.75b with profit before interest and tax of £321m, for the last financial year ending 30 September 1999.

Portfolio

• Granada Retail Catering
• Sutcliffe Catering Group (Sutcliffe Catering UK, Charters, Sutcliffe Catering Services Ireland, Momentum, Quadrant Catering, Circadia)
• Specialist markets (Baxter & Platts, Fairfield, Shaw Catering, Granada Healthcare Services, Summit Catering, Granada Defence Services)
• Little Chef (435 locations in UK), Travelodge (190 locations) and Harry Ramsden's (50 restaurants)
• Granada Motorways Services - 39% of MSAs in the UK
• Hotel brands Le Meridien (121 sites), Posthouse (81 sites), Heritage (47 sites) and Travelodge (195 sites)

The new company

Initially, the £18b merged company will be called Granada Compass. Within 12 months the hospitality and media divisions will be demerged and will be called Compass Hospitality and Granada Media.

• The purchasing power of Compass Hospitality is expected to be £2.7b a year.
• Cost of synergising is about £65m.
• Net debt at end March 2000: Granada - £1.9b; Compass Group - £1.1b.
• It will have three divisions:
• Contract food service (£775m turnover for year ended 30 September 1999); concessions - eg, catering at stadiums, shopping centres, motorway service stations (£794m turnover for year ended 30 September 1999); hotels - 58,000 rooms in more than 50 countries worldwide (£70m turnover for year ended 30 September 1999).
• Pre-tax profit of the Granada Group for financial year ended 25 September 1999 was £835m (turnover of £4.10b). Pre-tax profit for Compass Group for the year to September 1999 was £194m (turnover £4.82b).
• On completion of the merger today, holders of Granada securities will receive 66.25% of the fully diluted ordinary share capital of Granada Compass with holders of Compass Group securities owning 33.75%.
• The board of Granada Compass will have 16 directors drawn equally from both companies' boards. Following demerger, Compass executive chairman Francis Mackay is to be executive chairman of Compass Hospitality and Compass chairman Mike Bailey will be chief executive. Granada's chairman Gerry Robinson will remain chairman of the combined group until the demerger, after which he will retire but remain as consultant to the hospitality company and a non-executive director of the media company. On demerger, Granada's chief executive Charles Allen is to be executive chairman of Granada Media.

Source: Caterer & Hotelkeeper magazine, 27 July - 2 August 2000