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Granada, Compass merge
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May 17, 2000: 10:32 a.m. ET
UK firms to form $26B hospitality and media empire; media IPO ahead
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LONDON (CNNfn) - U.K. media and leisure conglomerate Granada Group announced Wednesday it would merge with food service company Compass Group in an all-share deal, creating a firm worth more than £15 billion ($22.8 billion).
After the merger, Granada plans to split the hospitality and media businesses and sell the media unit in an initial public offering within six months. Granada is the U.K.'s largest hotel operator and has extensive television interests. 
Granada said Wednesday that its media arm was valued by analysts at between £6.4 billion and £7.4 billion. Granada had a market value of £10.3 billion at Wednesday's stock price, while Compass was capitalized at £4.9 billion.
The merger with Compass, the world's second-largest food service and contract catering company, will give Granada shareholders 66.25 percent of the merged company.
"This is exactly the right deal for us," Gerry Robinson, chairman of Granada, said in a statement. "It puts into effect the demerger that we have long believed right."
Investor Skepticism
However, investors showed their skepticism by pushing Granada (GAA) shares down 7.1 percent to 557 pence in early afternoon trade in London, while Compass (CPG) slumped 6.2 percent to 721 pence.
Commerzbank Securities lowered their rating on Compass shares to "reduce" from "hold" following the merger announcement. "The main benefit of the deal seems to be to free up a media 'pure play', debt-free, to pursue acquisition opportunities," the brokerage said in a research note. "Conversely, Compass loses its own pure-play status with the new-look hospitality saddled with £3 billion-plus [in] debt."
The company also said it was prepared to offer cash in its pursuit of U.K. media rivals Carlton Communications (CCM) or United News & Media (UNWS). The two announced their own plan to merge last November before Granada stepped in to announce its interest in acquiring one or other of them.
U.K. regulators are currently reviewing the Carlton-United tie. Granada said it would await the outcome of the review before restarting its pursuit.
Robinson's cruise
Robinson was chief executive officer of Compass when the company listed on the London Stock Exchange in 1987. After moving to Granada, he took the company into the food-service business.
Robinson plans to leave Granada once the deal is complete, handing control of the media division to Charles Allen will run the. Compass Chairman Francis Mackay will run the hotel and catering business.
Both companies have built up strong brand names by acquisition. Among Granada's assets are the Little Chef chain of roadside diners and Harry Ramsden's fish-and-chip restaurants, while Compass owns Upper Crust, an operator of food concessions at railway stations, café chain Caffe Ritazza, and operates Burger King restaurants under a franchise agreement for Diageo (DGEO).
Granada and Compass said they expected the merger to generate cost savings of about £75 million by the third year following the merger. When the media and catering businesses are split, Compass Hospitality is expected to have revenue of more than £7.5 billion.
 Granada shareholders will get 0.7547 shares of the new Granada Compass for each of their Granada shares, while Compass shareholders will swap each of their old shares for one share in the new company.
Both companies also reported half-year profits. Granada said pretax profit before one-time items rose 10 percent to £330 million for the six months to March 25, while Compass reported a 15 percent rise in first-half pretax profit to £90.7 million. 
-- from staff and wire reports
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