In May 2000, the UK's Granada Group plc announced a merger with Compass Group plc, a move that signalled the start of one of the most intense periods of corporate activity by a single company seen in the City of London in recent years. The joint announcement by the boards of Granada and Compass set out the terms of their proposal to create two focused, world class groups. These were to be:
Granada Media ? a major, independent media group based on Granada's existing media division (which includes the Independent Television (ITV) licences of Granada TV, Yorkshire Tyne Tees, and LWT; a 50% interest in ONdigital; a 50% interest in BoxClever (the joint venture company which owns Granada's and Thorn's television rentals business); and smaller interests in ITN and Scottish Media Group plc); and
Compass Hospitality ? one of the world's largest hospitality groups, combining Compass' existing hospitality businesses with those of Granada (which include the Posthouse and Meridian Hotel chains, and the Sutcliffe catering group). Achieving this meant that a number of large, interlinked transactions had to be planned within a relatively short period of time. These included:
initially, the £18 billion ($26 billion) merger between Granada and Compass to create Granada Compass plc;
the reorganization of the former Granada and Compass businesses between the media and hospitality divisions to facilitate the initial public offering (IPO) of Granada Media and the eventual demerger of the combined hospitality businesses;
the IPO of 20% of Granada Media, which raised £1.5 billion in new cash to enable Granada Media to make future strategic acquisitions (the IPO valued Granada Media initially at £7.5 billion and it is now included in the FTSE 100);
a possible public bid for the Carlton or United media groups (although, as described below, Granada Media agreed, ultimately, subject to shareholder approval, to acquire United's media interests for approximately £1.8 billion including debt);
the eventual demerger of the former Granada and Compass Hospitality businesses to create a new listed company, Compass Hospitality plc (which will be one of the largest demergers seen in the UK); and
following the demerger, the consolidation of the separate stock market listings of Granada Compass and Granada Media into one single listing through Granada Compass plc.
Throughout this structure planning stage, there was considerable uncertainty as to whether Granada Media would, in fact, be allowed to make a public bid for Carlton or United by the UK Competition Commission. However, the Commission's review of the ITV network was, ultimately, highly favourable to Granada Media because it effectively prevented United and Carlton merging, but permitted Granada Media a free hand in bidding for either (in the event, Granada Media and United agreed a deal which avoided the need for a public bid).
During this period, it was also necessary to complete the near £1 billion BoxClever joint venture with Thorn (owned by Nomura), which had been announced at the end of 1999.
Clearly, the number and complexity of these transactions required meticulous planning before the initial announcement of the tie-up between Granada/Compass was made, to ensure that there would be no obstacles to achieving Granada's and Compass' commercial objectives. The structuring plans also needed to be flexible to accommodate the changes that are invariably required when putting together such complex arrangements (the transaction with United was a case in point, since Granada Media ultimately avoided the need to make a possible public bid for United).
In broad terms, the structuring of these transactions was to be implemented in two stages:
the merger, including the IPO and acquisition of United's media assets ? stage one; and
the demerger of the former Granada and Compass Hospitality businesses, and the consolidation of the Granada Compass and Granada Media listings into one single media listing under Granada Compass ? stage two.
STAGE ONE
The merger
For a number of reasons associated with the size of the transactions, the intended demerger plans and the desire for the merger to be regarded as such, it was determined at an early stage that it would not be appropriate for Granada to acquire Compass (or vice versa). Consequently, it was agreed that the merger would be achieved by interposing a new company between Granada and Compass, and their existing shareholders.
Accordingly, under separate interconditional Schemes of Arrangement under section 425 of the UK Companies Act 1985, Granada and Compass cancelled the shares held by their respective shareholders and reissued their shares to a new holding company, Granada Compass plc. In consideration of this, Granada Compass plc issued new shares to former Granada and Compass shareholders.
For the schemes to become effective, the approval of Granada/Compass shareholders as well as the permission of the court was required, both of which were obtained. The effect of the schemes was to give former Granada shareholders 66.25% of Granada Compass and former Compass shareholders 33.75%. The schemes became effective at the end of July 2000.
It was considered that the merger would qualify as a scheme of reconstruction or amalgamation for the purposes of section 136 of the Taxation of Chargeable Gains Act 1992. Tax clearances under section 138 of the Taxation of Chargeable Gains Act, and under section 707 of the Taxes Act 1988 were sought, and received, from the UK Inland Revenue for the merger. The effect of this for UK shareholders was, therefore, relatively straightforward in that they would be entitled to rollover any capital gain on the disposal of their Granada or Compass shares into their newly-issued Granada Compass shares. Given that the merger was effected by means of "cancellation and reissue" Schemes of Arrangement, no stamp duty was payable by Granada Compass on its acquisition of Granada and Compass shares.
The IPO of Granada Media From a commercial perspective, it was considered attractive (pending the eventual demerger of the hospitality business) for Granada Media to have a separate stock market listing, since it could then access the equity markets for cash to pursue its own acquisition objectives. Moreover, it was considered that Granada Media shares would be attractive to those investors who wanted to invest in a pure media company, rather than one which has had investments in non-media interests (such as Granada Compass which also had its hospitality business).
As a result, it was agreed that the Granada Media business should be focused under a single holding company, Granada Media plc (a pre-existing holding company), and that this company would issue, through an IPO, initially up to 20% of its enlarged equity to new investors for cash. A large proportion of the IPO was targeted at US institutional shareholders. In addition, it was anticipated that this company would acquire Carlton or United if a bid for either of those companies was pursued. The listing of Granada Media took place in late July 2000 and £1.5 billion of new cash was raised from the IPO. From a commercial and tax standpoint, it was desirable for Granada Media to remain part of the Granada group. Accordingly, on the tax side, Granada Media was structured so that it would remain a member of the Granada (and subsequently Granada Compass) capital gains tax group not only after the initial IPO, but also following any issue of shares to Carlton/United shareholders (in excess of 75% of its ordinary share capital will, for tax purposes, continue to be owned by Granada and it will also be an effective 51% subsidiary of Granada as defined by the UK's Taxation of Chargeable Gains Act). One unusual aspect of the IPO is that the public Granada Media shares (ie those shares not held by Granada or its group) have been issued subject to mandatory exchange provisions contained in its Articles of Association. This enables these public shares to be compulsorily ?exchanged' for Granada Compass shares without shareholder approval. This will be discussed further later in the article.
The reorganization of media and hospitality In conjunction with the merger of Granada and Compass, the IPO of Granada Media, and the proposed demerger of the hospitality business, it was clearly necessary to segregate the assets and liabilities of the media and hospitality businesses so that each division existed on a standalone basis. To achieve these objectives, a series of transactions were entered into, resulting in the creation of a new hospitality holding company ? Hospitality Holdings ? within the Granada Compass group. All hospitality businesses, assets and liabilities formerly owned by Granada and Compass were then transferred to this company.
The acquisition of United's media assets In planning the merger of Granada and Compass and the IPO of Granada Media, it was necessary to consider how a public bid for Carlton or United could be accommodated within the structure of these transactions. Granada Media's ability to bid for either (or, indeed, neither) of Carlton or United was dependent on the outcome of the UK Competition Commission's review of ITV. This review continued throughout the structure planning process and, therefore, the various possible conclusions which the Commission might reach had to be factored in at each stage of the structure planning. In the event, the Competition Commission concluded that, while Granada Media could merge with either Carlton or United, neither Carlton nor United, who at that time were proposing their own merger, were permitted to merge with each other unless they divested various elements of their combined ITV interests, including potentially Meridian TV. This conclusion defeated the commercial rationale for the Carlton/United tie-up and they terminated their proposed merger in late July.
Shortly thereafter, United agreed to transfer its media interests (including HTV, Anglia TV and Meridian) to Granada Media, subject to shareholder approval, for a consideration of approximately £1.8 billion including debt. In concluding the United deal, a structure was created to enable United to transfer its media interests to Granada Media and for Granada Media to issue its shares directly to United shareholders.
Tax clearance under section 138 was sought from the UK Inland Revenue for this transaction structure. The overall effect of the transaction was to enable United's UK shareholders to rollover any capital gain on the disposal of an interest in United into the newly issued Granada Media shares. The issue of shares to United shareholders by Granada Media will not, as mentioned earlier, cause Granada Media to leave the Granada Compass capital gains tax group.
The successful acquisition of United's media interests effectively concluded the stage one process and leaves the Granada Compass group with its businesses segregated into the media division on the one hand and the hospitality division on the other, and substantially leaves Granada Compass plc in a position to consider implementing its demerger proposals, ie stage two.
STAGE TWO The stage two transactions concentrate on the actual technical, legal separation of the media and hospitality businesses into two new listed groups: at the time of writing, these transactions have not yet happened and are, therefore, subject to change. However, the separation is intended to occur first through the demerger of the hospitality business, and then the consolidation of the media listings.
The demerger of the hospitality business At the time of the merger, the boards of Compass and Granada agreed that they would seek to implement a demerger of the hospitality business within 12 months of the merger. Although a number of demerger structures were reviewed, Granada Compass plc considered that the most appropriate manner in which to reconstruct the hospitality business and achieve the demerger would, subject to shareholder approval, be likely to be through a reduction of its capital approved by the court under either section 135 or section 425 of the Companies Act 1985. (To effect this, Granada Compass plc proposes cancelling an appropriate proportion of its share capital and transferring the hospitality business to a new company ? Compass Hospitality plc ? in return for which that company will issue new shares to all Granada Compass shareholders.)
The effect of this will be that Granada Compass shareholders will own shares in Granada Compass (owning, indirectly, a significant shareholding in Granada Media) and new shares in Compass Hospitality plc, thereby owning the former hospitality business of Granada and Compass.
It is anticipated that the demerger will qualify as a scheme of reconstruction within section 136 of the Taxation of Chargeable Gains Act, and that UK shareholders will be able to rollover any capital gain on the disposal of an interest in their Granada Compass shares into the new Compass Hospitality shares issued to them. As, for tax purposes, the paid-up capital on the Granada Compass shares issued on the merger will be substantial, the manner of effecting the demerger should, among other things, assist in preventing distribution issues arising for Granada Compass shareholders.
It is, of course, intended that Compass Hospitality plc will have a stock market listing and, given its probable market value, will qualify for inclusion in the FTSE 100.
The consolidation of the media listings As the final piece of the jigsaw, it will be desirable for the separate stock market listings of Granada Compass and Granada Media to be consolidated into one single listing once the demerger is completed. Although a number of structuring ideas to achieve this were considered, it was decided that the Granada Media listing would eventually end and that, following the demerger, all public Granada Media shareholders would become Granada Compass shareholders.
Accordingly, as mentioned earlier, the public Granada Media shares have been issued subject to mandatory exchange provisions. Under these provisions, the shares can be cancelled under section 135 of the UK Companies Act 1985, without their holders consent, by Granada Media in connection with, but following, the demerger of the hospitality businesses to Compass Hospitality plc. On cancellation, Granada Compass has agreed, through a series of arrangements, to issue new shares to former Granada Media shareholders affected by the cancellation. As a result, Granada Media will become a wholly-owned (indirect) subsidiary of Granada Compass plc. When it occurs, it is anticipated that UK and US shareholders will be able to rollover any capital gain arising on the cancellation into the new Granada Compass plc shares issued to them.
Stage Two ? the end result As a result of the demerger and the consolidation:
Granada Compass plc (as named at present) will be the UK's largest independent television company;
Compass Hospitality plc will be the UK's largest hospitality business;
Granada Compass plc's shareholders will comprise former Compass shareholders, Granada shareholders, former public Granada Media shareholders and former United News and Media shareholders; and
Compass Hospitality plc's shareholders will comprise former Granada and Compass shareholders.
Conclusion
The combination of commercial and tax issues arising in this series of transactions was unusual and highly complex. It involved not only planning, simultaneously, an £18 billion merger, a media IPO, a possible public bid for a competitor, a demerger, a consolidation of multi-listings but also a large number of other related transactions. Individually, many of these would not be regarded by most companies as unusual; however, bringing them all together at once is rare.
