An eventual demerger of Granada into its main constitutents of hotels and media could be the last act of the partnership which created the giant.
The share price has bounced back to pre-1997 levels, the £3.9 billion takeover of hotels group Forte is bedded down, and the extra £100 million of profit it claimed the takeover would unlock is all but in the bank. All in all it seems Granada's dynamic duo, Gerry Robinson and Charles Allen, have much to smile about.
And yet doubts do remain - not so much about the merits of the Forte acquisition as about whether Granada should remain as a much enlarged conglomerate that uncomfortably straddles the media and leisure sectors.
The structural issue is also bound up with the question of how long the Robinson-Allen partnership will continue.
Certainly the company has been out of favour with the City for much of the last year. In the 12 months to August, Granada shares underperformed the stock market by 22%. By contrast, the full year 1996 saw Granada become the best-performing stock in the FTSE-100 index. Was the stock taking a temporary breather - as the recent gains suggest. Or had investors spotted a fundamental weakness in the group? In short, has Granada created an unwieldy leviathan that can only regain its premium rating in the long term through a structural shake-up, such as a demerger into its main constituent parts - hotels and catering on the one side and media on the other?
The truth, probably, lies somewhere in between. Forte was a huge meal for Granada, and it would be natural if the City feared the takeover might give Robinson and Allen indigestion. Debt gearing in the immediate aftermath of the takeover hit the giddy heights of 389%. As analysts at UBS pointed out, Granada was also hit by a de-rating of the hotels sector on fears that it had peaked; the fall in the share price of BSkyB, the satellite broadcaster in which Granada holds an 11.5% stake; and slowing ITV advertising growth.
Moreover, although Granada reached its stated target of realising £1.3 billion from disposals of Forte businesses by September, it did so by an unexpected route that still left a lingering element of uncertainty about the merits of the takeover. During the bid, Robinson and Allen had pledged that the money would essentially come from the sale of hotels.
But of the £1.35 billion raised by the end of August, £476 million came not from hotel sales but from the disposal of Welcome Break, the motorway service station chain which had to go in order to satisfy the competition authorities' concerns about Granada's share of the market. A number of hotels, notably the Grosvenor House in London, remained on Granada's books (although negotiations for a £300 million-plus sale of the Grosvenor are continuing). And the Meridien chain of contract-managed hotels was retained, despite Granada's previously stated aim of selling them.
Robinson believes Granada's failure to win full credit from the City for reaching its objective stems from the expectations it aroused during the bid. 'In the normal course of business, you can reach a target any way you like and the investors will be happy. But because you have been in a takeover bid, you are tied to one particular story,' he says.
While the City reaction clearly irked them, Robinson, 48, and Allen, 40, retain the self-confidence that has helped propel them to their present eminence as leaders of Britain's largest leisure group, valued in mid-October by the stock market at £8 billion.
Compared with previous challenges they have met and mastered, the share price reaction was a relatively minor setback. And if any one quality distinguishes the Granada duo from their peers, it is their track record in confounding expectations and overturning conventional wisdom. Allen says: 'Challenging orthodoxies and breaking the rules is something we have both done in every business. We just do not accept the status quo, because there are always better ways to do things.'
The greatest single example of that credo was the Forte bid itself. Robinson and Allen were far from the first people to conclude that Forte was poorly managed. But they were the only ones prepared to question the received wisdom that the trust in which control of Forte resided made the company bid-proof. When initial legal advice endorsed that view, Robinson and Allen persisted until they found a path through the maze. Thus exposed, Forte crumbled. Its takeover defence did force Granada to pay slightly more than Robinson and Allen had wanted, but at the first closing date they were swamped with acceptances from Forte investors exasperated by years of underperformance.
The bid had a significant sub-text, because it marked the overthrow of a potent element in industry's ancien regime. If anything took the unflappable Robinson by surprise, it was the degree to which the great and the good rushed to the Forte barricades. Robinson was accused of old-style conglomerate empire-building, in some cases by the very people who had lionised the likes of Jim Slater and Lord Hanson.
The reality was that Robinson and Allen had spotted one of the last great opportunities to transform a poorly-run combine into a motherlode of shareholder value. Robinson says: 'The upside in Forte is considerably greater than we thought it was. Forte has another four or five years of serious upside attached to it. It is very like the Granada of five years ago: it has good assets, a lot of good businesses in good locations, and lots of fast payback things we can do better. The returns from managing businesses like Travelodge and Post House effectively will be very high. We can make a 25% return on investment in Travelodge, for instance, and there is a lot of investment to be made in it.'
Granada raised eyebrows - and rendered Forte apoplectic - during the bid by claiming it could generate £100 million more profit in the short term from the Forte businesses. 'That £100 million is very much done,' Robinson says. 'But it is only the beginning.'
Robinson and Allen moved with characteristic speed to streamline and reinvigorate the heartland Forte businesses that had been neglected in the group's quest to establish itself as a luxury international hotelier.
For them the middle-market hotels were the essence of Forte: that was where most latent value was to be unlocked.
What they found were a jumble of conflicting brands, a mountain of overhead duplication, and a drastic lack of selling edge. After listening to what the Forte managers had to say, Robinson and Allen decided to see for themselves by sitting in the Forte central call centre. Says Robinson: 'You learn more in a day from doing something like that than by hiring a host of hotel gurus.'
Allen went through the Forte management like a dose of salts. 'There were 150 managers in the UK hotels,' he says. 'One-third were excellent: you could take them and move them around and you could see a performance improvement where they went. Another third were what I call maintenance managers: they were able to maintain performance at a certain level, either high or low. But they were not change managers. The last third weren't very good.'
The structure and culture in which the managers operated was also badly flawed, he says. 'The hotels would compete with each other. They all had their own sales teams, personnel people, finance staff. There were 12 brands; each was a business in its own right. And, of course, there was a very significant head office.'
Action was swift and sweeping. The head office went, replete with a floor that had been nicknamed Death Row by Forte staff because it used to be occupied by semi-redundant executives. Of the 900 top UK managers, 500 were axed. Robinson and Allen took out three layers of management. A central purchasing unit was established to maximise cost-savings from bulk-purchasing for Granada's catering division and the hotels. And the welter of businesses was consolidated into three clearly defined divisions: London, UK Provincial and International.
To get the most out of the UK hotels operation, Allen knew he had to give maximum scope to the minority of quality managers he had identified.
These 'change managers' are what the Granada chief executive calls 'deliverers'.
By scrapping the time-honoured system of individual hotel general managers, Allen was able to cluster the UK side into geographical groups of three or four hotels, each unit run by one of the Forte first team. In turn, this enabled him to ensure that the manager of an individual hotel was focused entirely on the customer, rather than distracted by administrative duties.
That was phase one. Allen is now deep into phase two of the reinvigoration.
'Now we are really saying, let's get back and look at the hotels in a lot more detail,' he says. 'Have we structured the thing right for the customer? How can we improve it?'
Allen's appetite for the minutiae of a business is insatiable. Productivity in hotel housekeeping has been transformed by a complete overhaul of the Forte system under which housekeepers were paid a standard rate no matter what size the room. 'The longer it took them to do the room, the better,' says Allen. Now staff are paid according to which type of room they service.
The new system not only incentivises staff - 'Once they finish, they can go,' Allen says - it enables hotels to prioritise the check-out rooms and improves turnround times.
Then there is Little Chef, perhaps the most neglected part of the old Forte empire. Allen has just launched an advertising and marketing campaign to revive the brand - 'the first Little Chef ad campaign ever', he laughs.
Granada is now experimenting to see whether it can develop Little Chef into a high street and shopping mall fast-food chain. Like all Allen's ideas, this one will be meticulously trialled before a decision is taken to commit substantial investment.
As Robinson and Allen provide evidence of the organic growth they are producing from Forte, the concerns that overshadowed the share price for much of 1997 will recede. Granada is generating between £500 million and £600 million a year in cash and it has at least another £500 million-worth of disposals to go, excluding its stake in the Savoy group, a holding estimated to be worth about £250 million. Non-core parts of Granada's other operations are also on the way out, such as the computer services division that was sold in September to a management buy-out for about £90 million.
Nevertheless, Robinson and Allen have still to answer a number of questions about the remaining core businesses. Their catering operation has higher margins than either of its two main rivals, Sodexho and Compass, but unlike theirs it is almost entirely confined to Britain. Analysts wonder whether Granada can find the acquisitions it needs overseas, while sustaining the present margins at home. Nigel Reed, leisure analyst at Paribas, says: 'They have pushed the margins on UK contract catering about as far as they can, so future profit growth will have to come from revenue rather than margin increases - and that will slow down the growth rate.'
Rental of television, video and other brown goods (almost 90% of group profits when Robinson and Allen took over five years ago) is an innately declining business, which is being run - lucratively - for cash and is nicknamed by group managers 'the Northern Ireland posting'. Since rental would not fit with either hotels and catering or media, it would inevitably have to be sold in the run-up to a demerger. That could create problems, because it is probably worth more to Granada as a provider of cash for the growth businesses than it would realise in a disposal.
However, if the logic of a split becomes overwhelming, Robinson and Allen would have no compunction in pushing ahead. The key determinant will be the value of the media side, in sales terms the smallest of Granada's main operational groups but where margins are by far the highest.
For a long-established business whose best-known product is the venerable Coronation Street, Granada Media is in the throes of a protracted metamorphosis that has been under way almost from the day Robinson and then Allen moved in. Then, it was making £5 million a year from its north-west of England franchise and the programmes it sold to the ITV network. Next year, it is likely to generate pre-tax profits of almost £200 million. Robinson and Allen have grown it on all fronts: in ITV broadcasting, buying LWT, the London weekend franchise, and, this summer, YTTV, the Yorkshire and Tyne-Tees regional operator; in satellite television, by building on the BSkyB stake to develop their own satellite channels; and this year, by positioning themselves for the digital television revolution by forming British Digital Broadcasting (BDB) with Michael Green's Carlton group. BDB will lead Granada into the potentially lucrative realms of pay-per-view television.
But perhaps the most signal decision by the Granada duo was to expand Granada's programme-making side in a period when most ITV companies were selling or closing their studios and contracting out their programme making.There have occasionally been tensions between the Robinson-Allen drive for shareholder value and the economics of programme-making: during a budget meeting after the LWT takeover, one producer told Robinson: 'For the price you want, all you will get is London's Smouldering.' But overall, a richly-rewarding balance has been struck.
'It's not an accident that we own the three largest producers in the ITV network,' says Robinson. The programme-making side is internationalising the Granada group: spearheaded by an American version of Cracker, Granada has established a new subsidiary in Los Angeles to develop US programme production. Leaving aside the US market itself, the additional scope for programme sales is immense: the original Cracker sold to 43 countries; the US version has been pre-sold to more than 70.
One German station is considering a Teutonic Coronation Street. 'The next stage will be providing channels,' says Allen. 'A channel is only a selection of programmes packaged together. GSkyB (Granada's BSkyB channels) is an umbrella driving that strategy.'
The media side nonetheless faces big questions. Looming rapidly is whether Granada should stay inside BSkyB, where it retains an 11.5% stake valued in mid-October at £679 million. Granada's ITV interests have co-existed peacefully enough with the satellite network 40%-owned by Rupert Murdoch's News Corporation - Robinson himself is chairman of BSkyB - but the advent of BDB complicates the picture. The new franchise will be both a customer of BSkyB's rights to sports events and films and a competitor of the channel.
Faced with rising conflicts of interest, Granada appears likely to opt for the sale of its stake in the medium term.
At the same time, Robinson and Allen believe that the three major players in ITV - Lord Hollick's MAI is the third, alongside Granada and Carlton - will increasingly work together. In the long term, the Granada duo believe, stands the prospect of a full-scale union. At the opposite end of the evolutionary scale, the start-up BDB will remain an unknown quantity for perhaps five years.
By then, a demerger is conceivable but not certain. Allen says: 'The big issue is the rating of media, which should increase the bigger the more international we get. UK media stocks relative to global media stocks look cheap, and the UK media sector is higher rated than leisure. Media is an asset play that will become increasingly valuable. If you are having difficulty telling investors that story, then you would have to address the structural issue.'
To an extent, the demerger issue may parallel the future of the Robinson-Allen partnership. Always careful not to cramp his colleague's style, Robinson is now fulfilling the chairman's role of keeping a watchful eye on the business and attending to 'environmental' issues affecting it, while Allen drives through the detailed implementation of their jointly developed strategy. Within five years, Robinson is likely to hand over the reins entirely. That may be an appropriate moment to split the businesses, since even the indefatigable Allen might find running the equivalent of two fully-fledged corporations a heavy load.
When Robinson does step down, that moment will mark the end of what is already a remarkable partnership. The two men have worked together for a dozen years, from their days when the catering business that became Compass was embedded in Grand Metropolitan. Like many great teams, their styles and interests are complementary: Robinson the genial master of ceremonies, Allen the urgent, hard-driving executor: the ultimate deliverer.
Their business philosophy, however, is identical. Both insist that service company management - in contrast to that of technology-based concerns - is often made unnecessarily complicated by managers who want to cover their own inadequacies. 'Business is about PVC,' says Allen. 'Price, Volume, Cost. You can change the price of your product, move the volumes positively or negatively and manage it at lesser cost. Those are the only three things you can do.'
Behind his laid-back mien, Robinson also shares Allen's restless ambition and the recognition that it can never be fully satisfied. Allen says: 'You delude yourself if you think the business game is a destination.
It is a journey. That's why you turn up for work every day. You get to the top of one hill and realise there are three more beyond that.' He and Robinson are still climbing.
Andrew Lorenz is business editor of the Sunday Times.