Granada Finds That Good News Is Not Enough

Last year, Granada succeeded with an audacious, 3.9bn hostile takeover of Forte, the UK's largest hotels group. For a while thereafter, its shares strongly outperformed the FTSE All-Share. This week, it delivered half-year results at the top end of expectations. They revealed a 33 per cent rise in pre-tax profits, before a net 22.8m exceptional gain, to 243m (183.3m). It also announced the beginning of another takeover, this time for Yorkshire-Tyne Tees Television which Granada has stalked for more than a year.

Yet the shares have lost their shine, dropping from 902p on Tuesday, the day before the results, to 891 1 /2p last night. Indeed, they have underperformed the market by more than 10 per cent since mid-March. This is not something to which Granada's investors are accustomed.

 

The recent weakening is due partly to Mercury Asset Management - which supported Granada in the Forte bid - selling shares. This was done to reduce its holding from 17 per cent to 7.6 per cent after being ''overweight'' in the stock. The market is nervous about hotel stocks in general, fearing that new building could lead to an over-supply.

Then, too, Granada's hotels disposal programme is taking longer than expected. Gearing is still very high despite 1.3bn of disposals since the Forte takeover but the interest is covered at just under three times and is likely to rise to four times by the year-end.

There are other sales to come, including the rest of Exclusive hotels chain (excluding the Grosvenor House in London) which have a book value of 170m, and Granada's 68 per cent stake in the Savoy hotels group.

The computer services division could fetch up to 70m and Granada is also considering selling the French motorway service stations acquired through the Forte takeover and valued by analysts at 80m. Granada argued this week that there was still ''tremendous upside'' to be had from tight management of Forte. It also placed heavy emphasis on the group's future in television. Years ago, senior staff at Granada Television expressed fears that the company might one day tire of the medium and sell off the business. If that ever was true, it certainly isn't now.

''The attractive thing about programmes is that you can sell the same ones over and over again,'' said Charles Allen, chief executive, sounding as if he had found a way of turning base metal into gold. Granada was laying on the joys of television ownership with a trowel to explain how it could grow the value of television within the group instead of floating it off separately. That option was considered seriously earlier this year but has now effectively been ruled out for the foreseeable future. A takeover of Yorkshire-Tyne Tees, which could be achieved within three months if shareholders agree, would make Granada by far the largest ITV company and enable it to sell the north of England as a single advertising region.

Meanwhile, winning a commission to make 13 episodes of the Cracker drama series in the US for the ABC network indicates a way forward for its international production business. Moreover, apart from its stake in British Sky Broadcasting and its hopes of winning digital terrestrial licences, Granada hopes that new channels, backed up by programme production skills and programme libraries, will lead to remarkable value creation. Already, Granada has launched eight new channels or programme segments for cable and satellite.

With underlying full-year profits expected to be about 645m and earnings per share of 50p, Granada's prospective price-earnings ratio - the broad measure which compares share prices with profits - is 17 times and in line with the sector average.

Analysts agree that the shares are a firm hold - but some doubt if they are a good buy.

Wayne Sanderson, leisure analyst at Merrill Lynch, believes the good news is in the price already.

He adds: ''Granada has got fantastic management but it's difficult to see what will make the price motor from here. ''It's such a big company now that it will be difficult to keep the growth rate going and to beat expectations. To that extent, the company is a victim of its own success.'' Copyright Financial Times Limited 1997. All Rights Reserved.