Grand Metropolitan Plc

11-12 Hanover Square
London W1A 1DP
England
01-629-7488

Public Company
Incorporated: 1934
Employees: 137,195
Sales: £5.287 billion (US$7.772 billion)
Market value: £5.064 billion (US$7.445 billion)
Stock Index: London

Grand Metropolitan is a highly diversified British-based company. It began as a property company, but its subsidiaries now cover a broad base of consumer products and services, including hotels, casinos, breweries, dairies, distilleries, and health care services. Maxwell Joseph, the founder of Grand Metropolitan, encouraged the rapid growth of his company by supporting acquisitions in profitable fields; its diversification has been indicative of the company’s quest for maximum profits and maximum control of selected markets.

Born in 1910, Maxwell Joseph left school at the age of 16 to begin a career with local real estate agents in north London. He was paid the equivalent of six dollars per week for selling houses and other property. Shortly after mastering the intricate sales techniques and valuation skills of a successful realtor, Joseph established his own property firm in 1926, and that firm has grown to be Grand Metropolitan, now one of Britain’s largest and most diversified companies.

Throughout the late 1920’s and the 1930’s, Joseph attempted to purchase good properties which would bring a high return when resold by his firm. However, because the English economy was in the midst of a depression, there were few prospective buyers and even fewer who could offer the kind of money that would meet his profit criteria. The advent of World War II deflated Joseph’s hopes for a prosperous business.

Joseph’s firm finally began to move toward success, after the war, with the purchase of the blitz-damaged Mandeville Hotel in the Marylebone district of London in 1946. Throughout the 1950’s and 1960’s Grand Metropolitan expanded through the development and purchase of new hotels. Joseph later admitted that he bought these hotels for “chicken feed.” “Between 1950 and 1965,” he said, “there wasn’t a real estate man in the country who knew the value of hotels.” Joseph did; moreover, he understood what they would be worth in the future.

Grand Metropolitan’s base of operations widened as Joseph continued to purchase both more profitable and more prestigious hotels. The first such acquisition was London’s Mount Royal Hotel, acquired in 1957 for $2.8 million. Grand Metropolitan quickly followed that takeover with purchases of a number of other luxury hotels throughout Europe. In Paris, Joseph purchased the Lotti Hotel; in Cannes, the Carlton Hotel; in Copenhagen, the Hotel d’Angleterre. By the end of the 1960’s, Grand Metropolitan had established a significant presence in the European hotel industry.

Because of the financial success of the Grand Metropolitan hotels, Maxwell Joseph felt confident enough to embark on a new strategy of diversification. He initiated the purchase of Express Dairies in 1969. The two-part purchase was completed in 1970 with approval from the shareholders of Grand Metropolitan and the former owners of Express Dairies. Because this purchase had received firm shareholder support, Grand Metropolitan went on to purchase Berni Inns, Ron Nagle, and Truman Hanburg. Of these varied acquisitions, the Truman Hanburg deal was the most significant because it was Grand Metropolitan’s first brewery. This particular acquisition also involved the largest takeover deal in Britain up to that time — the purchase price amounted to £400 million.

Seeking a financially equivalent takeover in 1972, Joseph purchased the Watney-Mann brewery. His purchase of Watney was fully justified in terms of company strategy. Grand Metropolitan already had a 49% stake in Carlsberg, a Danish brewer. Stanley Grinstead, the deputy chairman of Grand Metropolitan, and Maxwell Joseph were concerned that although they owned almost half of Carlsberg, they had no control over what brands were brewed. At the time, Carlsberg brewed only the Carlsberg and Tuborg brands of beer. Grand Metropolitan felt that, if it wished to expand in the beer market, it must acquire and control a less parochial beer company such as Watney-Mann.

Despite the future positive effects which all of these extensive purchases could have produced, Grand Metropolitan had incurred a large debt, particularly as a result of the purchases of Truman Hanburg, Express Dairies, and Watney-Mann. There were management failures at Watney-Mann which exposed Grand Metropolitan to severe financial losses. Furthermore, the company’s expansion into Italy and France could not be effectively controlled from London. The company learned that it had to send special advisers into the foreign country in order to establish partnerships and gain a share of the market—but that, too, was a costly lesson.

In 1974 the company’s debt peaked at £528 million, and Grand Metropolitan was forced to sell some of its smaller businesses to decrease that debt. For example, Joseph decided to sell the Royal Manhattan Hotel of New York and close the Vandenheuvel Brewery, which was one of Watney-Mann’s three breweries in Belgium; neither enterprise had been particularly profitable. To further decrease debt, Grand Metropolitan also sold its shares in Carlsberg beer for £5.39 million. By these and other similar moves, Grand Metropolitan began to reduce debt substantially and to reposition itself for a more careful acquisition strategy.

Grand Metropolitan’s 1977 purchase of 20% share in Pleasurama, a casino operator, was one of its most important of the decade. Pleasurama and Grand Metropolitan already operated a joint venture, the A.M Casino, an enterprise located in Grand Metropolitan’s Ritz Hotel in London. With the Pleasurama purchase, Joseph increased shareholder’s equity above the level of debt for the first time since 1969.

Jospeh had passed the usual retirement age of 65 in 1975, but he had refused to relinquish his chairmanship. He continued to distrust younger and less experienced associates with business decisions, and he insisted on personally approving all major transactions. Under Joseph’s guidance, Grand Metropolitan embarked in the late 1970’s on a second series of acquisitions in which “leveraged buyouts,” takeovers that incur huge debt, were carefully avoided. Occasionally, too, Joseph disposed of companies that were, in fact, profitable. Grand Metropolitan had purchased the Savoy Hotel Group from Trafalgar House in 1978. The Savoy Group was profitable, but it yielded only a 2% return. Joseph sold the Savoy Group to the Rothschild Investment Trust for £8.4 million, and Grand Metropolitan subsequently invested in other higheryielding businesses.

For many years the Liggett Group, an American tobacco and liquor company, distributed Grand Metropolitan’s J&B brand Scotch whisky in the United States. In 1980, on reported sales equivalent to $6.2 billion, Grand Metropolitan made a $415 million tender offer for Liggett—a move that also signalled a change in Joseph’s attitude toward the American market, which he had in the past avoided. In purchasing Liggett, Grand Metropolitan would also gain control of Austin Nichols, a Liggett subsidiary well-established in the American liquor market. Shortly after Grand Metropolitan had made its bid, however, Liggett sold Austin Nichols to Pernod Ricard for $97.5 million. The Paddington Corporation, the Liggett subsidiary responsible for marketing J&B Scotch, therefore became Grand Metropolitan’s main concern in the tender offer.

Liggett’s management was strongly opposed to a takeover by Grand Metropolitan, fearing above all that Joseph would replace them with managers from Grand Metropolitan. As Liggett mounted a legal battle to thwart Grand Metropolitan, Standard Brands entered a competing bid of $513 million. Determined to succeed, Grand Metropolitan raised its tender offer to $590 million—a price that Standard Brands could not top and Liggett shareholders could not refuse.

In a separate, less successful bid, Grand Metropolitan failed to gain control over the Coral Leisure Group during 1980. The company’s bid, valued at £85 million, was opposed by many shareholders who lacked confidence in Coral’s ability to generate profit or future growth. Yet the decision to abandon Coral was, in effect made by the English Monopolies Commission, which ruled against the takeover.

The continued involvement of the Monopolies Commission in Grand Metropolitan’s affairs brought to light an increasingly urgent shortcoming in the company’s position: Grand Metropolitan had overemphasized its growth within Britain. With nearly 90% of its profits generated domestically, Grand Metropolitan would face other charges of monopoly control over certain markets if it continued to invest in British enterprises. The company’s overexposure within the British economy became problematic in 1980, when the country entered a period of recession. In response, Grand Metropolitan inaugurated three- and four-year management plans, intended to improve shortterm planning until the company could diversify geographically.

Grand Metropolitan achieved greater financial stability in 1981, largely due to Liggett’s success in selling Bailey’s Original Irish Cream and J&B Scotch in the United States. Increased sales of these products justified larger advertising budgets for them, which, in turn, helped to maintain their increased market shares. In order to derive greater profits from liquor sales in Britain, Grand Metropolitan attempted to enter the retail liquor business. But because the British government did not permit producers and distributors of liquor to own retail outlets, Grand Metropolitan was forced to adopt a different strategy: the company sub-leased its bars and restaurants to “outside” management, and thus circumvented the restrictions, while drawing at least a portion of the profits earned from retail liquor and food sales.

By 1982 Grand Metropolitan owned 66 hotels in Europe and the Middle East. That year, the company agreed to purchase the Intercontinental Hotel chain, consisting of 110 hotels, from Pan American World Airways in exchange for $500 million, Grand Metropolitan’s Forum Hotel chain, and several other smaller hotel properties. The Monopolies Commission, however, became so involved in this transaction that Grand Metropolitan at last decided to end its concentration on European markets. Thereafter, the company redirected investment capital to the largely unrestricted markets of the United States, where it established an American subsidiary called GrandMet USA Inc. This company was given direct responsibility for the operations of Liggett and three new companies: Western Dairy Products, in California; Express Foods Inc., in Vermont; and Dry Milks Inc., in Kentucky.

In Britain, Grand Metropolitan divested itself of both marginally performing subsidiaries and companies the operations of which were considered peripheral to Grand Metropolitan’s “core” industries. CC Soft Drinks Ltd., a subsidiary which bottled and distributed Coca-Cola in southern England, was sold to the Coca-Cola Export Corporation in 1984. The following year, Grand Metropolitan sold its Express Dairy subsidiary to Northern Foods for £51 million. Northern Foods subsequently purchased four other Grand Metropolitan dairies and a distributor, reducing Grand Metropolitan’s share of the dairy market by one-third. Proceeds from these divestments were used to strengthen Grand Metropolitan’s hotel and entertainment division, which in 1985 purchased the profitable Mecca Leisure group for £95 million.

During 1985, however, Grand Metropolitan again altered its corporate strategy. Because they correctly anticipated the phenomenal growth of health care services in the United States, the company’s board decided to make investments in that industry a company priority. Grand Metropolitan acquired Quality Care Inc., a large home health care and medical equipment company, and soon afterwards purchased an interest in Pearl Health Services. After it was taken over by Grand Metropolitan, Pearl established a large chain of dental and eye care centers intended to exploit opportunities in the American market for medical services in shopping malls and retail thoroughfares.

Despite the promising new health care ventures, Grand Metropolitan remained committed to its profitable hotel and entertainment division. After some deliberation, the company even refused a $900 million offer from Trafalgar of California to purchase the Intercontinental Hotel chain.

Grand Metropolitan appointed a new chief executive officer, Allen Sheppard, in 1987. Although the company had only recently entered the health care field, Sheppard believed that opportunities in this industry had already been exploited; he advocated the sale of Quality Care before the industry became unprofitably competitive. Grand Metropolitan thus halted its expansion in health care and resumed its purchases of “core” enterprises. In March 1987 Grand Metropolitan acquired Heublein Inc. from RJR Nabisco for $1.3 billion. Heublein had lost many of its non-beverage operations while a subsidiary of RJR Nabisco, but its beverages included such brands as Smirnoff vodka, Arrow liqueurs, Harvey’s Bristol Cream sherry, and Guinness Stout beer—brands now controlled by Grand Metropolitan.

Grand Metropolitan may be expected to remain primarily a hotel, entertainment, and beverage company. Its expertise and ability to maintain stable operations in these fields suggest that Grand Metropolitan’s future is relatively secure, particularly if it can continue to avoid the kind of debt that threatened to undermine its activities during the early 1970’s.

Principal Subsidiaries

Samuel Webster and Wilsons Ltd.; Ushers Brewery Ltd.; Watney-Mann and Truman Martings Ltd.; Watney Combe Reid & Co., Ltd.; Truman Ltd.; Phoenix Brewery Company Ltd.; Drybrough and Company Ltd.; Watney-Mann and Truman Brewers Export Ltd.; Watney-Mann National Sales Ltd.; Watney International Ltd.; Brouwerij Maes NV; Stern Braueri Carl Funke A.G. (78.3%); The Berni and Host Group Ltd.; Mecca Bookmakers Ltd.; London Clubs Ltd.; Compass Contact Services (UK) Ltd.; Grandmet International Services Ltd.; GM Health Care Ltd.; GrandMet USA Inc.; Alpo Petfoods Inc.; Atlantic Soft Drink Co.; Pepsi-Cola San Joaquin Bottling Co.; Liggett Group Inc.; Manns Northampton Brewery Co., Ltd.; Norwich Brewery Co., Ltd.; Diversified Products Corp.; Children’s World Inc.; Eden Vale Ltd.; Heublein Inc.; Pearl Health Services Inc.; Intercontinental Hotels Corp.; International Distillers and Vintners Ltd.; Paddington Corp.; Carillon Importers Ltd.; Gilbey Canada Inc.; International Distillers and Vintners France S.A.; Selviac Nederland BV; Gilbey Vintners Ltd.; Morgan Furze & Co., Ltd.; Peter Dominic Ltd.; W&A Gilbey (South Africa) (Pty) Ltd. (51%); Justerini & Brooks Ltd.; Gilbey’s of Ireland Ltd.; Croft Jerez S.A.; Croft & Ca Ltda.; International Distillers (Developments) Ltd.; Grand Metropolitan Information Services Ltd.; Grand Metropolitan Biotechnology Ltd.