Merger with Granada - Part 2

Compass Group PLC
17 May 2000

Part Two

2.2 Granada Media

Granada Media is a substantial, integrated and international content producer
and broadcaster with strong positions in content creation, free to air
broadcasting and pay television, and rapidly growing new media businesses.
This is reflected in Granada Media's organisational structure of Granada
Creative, Granada Broadcasting and Granada Broadband respectively.  These
divisions are supported by Granada Enterprises which provides the commercial
interface between the group and its customers, for example, the advertising
community. Granada Media will also include Granada's high street technology
rental business, which provides a valuable distribution arm for rapidly
changing, entertainment focused consumer hardware.

In the year to 25 September 1999, Granada's media division (excluding the
technology business) made an operating profit before digital television
losses of £274 million on sales of £998 million.

The Board of Granada believes that separating the media and hospitality
businesses will create shareholder value.  It is expected that the market
will attribute a higher rating to a separately listed, focused media
business, reflecting the ratings of its media peer group.  An independent
Granada Media will be better positioned to grow domestically and
internationally as communication technologies converge, as broadband develops
and as demand for content for new and existing platforms increases.

The changing international media environment

The global media market is undergoing a period of significant change driven
by three overlapping trends - technological convergence, vertical integration
and international consolidation.

Technological advances in delivery systems such as digital broadcasting for
television and radio, the internet and mobile telephony are creating many new
distribution platforms through which consumers can access content.
Convergence and the proliferation of new platforms are driving growth in
demand for multi-media content that can retain audiences, attract advertisers
and drive subscriptions and transaction volumes.

Vertical integration between content producers and content distributors is
occurring in a number of international markets.  The international media
sector has witnessed a number of significant mergers, acquisitions or
alliances, unifying content and distribution.  Sports rights holders
represent another source of original content increasingly integrated with
broadcasting interests.

International scale is increasingly important to media companies in order to
maximise efficiencies in programme production, to leverage content across a
range of international distribution channels and to spread production risk.
Technological advances in content distribution are driving regulatory reform
of media ownership rules and creating opportunities for media companies to
grow domestically and internationally.

Granada Creative

Granada Creative is one of the largest commercial television programme
producers in Europe and expects to make some 6,000 hours of prime original
programmes  this year across a range of genres. Granada Media has a proven
track record of producing the UK's most popular programme brands which
include Heartbeat, Stars in Their Eyes, A Touch of Frost, London's Burning,
Blind Date, the South Bank Show, Cold Feet and Dimbleby.  Granada Media has
built up its UK programme production business over the last forty years to
become the largest programme producer for ITV.  In 1999 it produced 47 per
cent. of ITV's original programmes and 79 per cent. of ITV programmes which
have over 10 million viewers, such as Coronation Street and Emmerdale.  ITV
is the largest commercial programme commissioner in UK broadcasting and it
intends to spend 70 per cent. of its £700 million annual programme budget on
original programme commissions this year.

Granada Media has been particularly successful in attracting, retaining and
developing on and off-screen talent, which is key to making the high quality
programmes that attract audiences and drive advertising revenue.  Its track
record in ITV has enabled Granada Creative to win an increasing level of
production commissions from other free to air broadcasters - the BBC, Channel
4, Channel 5 - and from other platforms and commissioners including BSkyB,
ONdigital and the Discovery Network.  Notable examples include the Royle
Family for the BBC, Longitude for Channel 4 and the Uncovered series for
BSkyB.

Granada Media generates additional revenues from its library of over 60,000
hours of original programmes by exploiting their secondary rights, including
international distribution, publishing and licensing rights.  To maximise the
value of its range of library material, Granada Media is building an
infrastructure capable of managing its entire output in digital format.

Granada Media has built a substantial presence in a number of carefully
selected, lucrative, international markets, using its successful track record
for original programme production as the initial point of entry. The
Directors of Granada believe that Granada Creative is one of the leading
European exporters of content, making overseas sales of around 15,000 hours
to over 125 countries in 1999. Granada Entertainment USA ('GEUSA') has been
successful in creating TV movies and customising UK formats for the major US
networks.  This has prompted the BBC to join GEUSA in a joint venture, GBTV,
to create US versions of British programmes.  In Australia, Granada has a
50/50 joint venture with Seven Network Ltd called Red Heart Productions which
is Australia's largest TV production company. Granada also has a 10 per cent.
stake in Seven Network, Australia's second largest commercial network, which
guarantees Red Heart at least 200 hours of programme commissions per annum.
Granada Creative has also successfully established production companies in
Germany and Hong Kong.

Granada Broadcasting

Granada Media is also one of the UK's largest commercial broadcasters,
accounting for 33 per cent. of ITV's advertising revenue.  ITV is the UK's
most popular television channel with around one third of all viewing.
Granada Media has increased its share of these advertising revenues by
organic growth and acquisition from £153 million in 1993 to £612 million in
1999.

As announced on 7 January 2000, Granada is considering making an offer for
either Carlton Communications or United News & Media on appropriate terms.
The making of any such offer would be pre-conditional, inter alia, on
regulatory consent being given in terms satisfactory to Granada.  Granada
will make a final decision as to whether to bid for Carlton Communications or
United News & Media (or for neither, even if the pre-conditions are
satisfied) when the outcome of the formal regulatory review process is known.
Granada believes that the progressive relaxation of media ownership
regulation in the UK is likely to continue, allowing further consolidation in
ITV ownership.  This would allow ITV to improve the speed of decision making,
enabling the ITV Network to enhance its competitive position.  Furthermore,
administrative and back office cost savings could be reinvested in the
programme schedule, to the benefit of viewers and advertisers alike.  Granada
Media's vision for the longer term future of ITV is of a national network
owned by one company with strong commitments to regional services and
regional production.

Furthermore, ITV would capitalise on its established relationship with mass
TV audiences to extend the channel from the core ITV brand to a family of ITV
branded channels - free to air and pay television - serving each of the key
affinity groups.

Granada Broadband

Granada Directors believe that Granada Media is well positioned to exploit
the opportunities that will arise from technological convergence, the move to
digital distribution of content and the growth of the internet and broadband
technology.

Granada has developed high volume, low cost production techniques at
specialist production centres that have enabled it to become a leading
content provider for Pay-TV.  It has created 'magazine' channels for specific
affinity groups with Granada Men and Motors, Granada Breeze and MUTV
(Manchester United TV).  It has initiated a t-commerce platform under Shop! -
a joint venture with Littlewoods - and it has also created two channels to
leverage its library of classic material, domestically through Granada Plus
and internationally through GUKTV.

Granada Broadband is developing a number of complementary internet businesses
under a unifying Granada portal.  It owns 25 per cent. of the UK version of
the highly successful US search engine Ask Jeeves, which has already become
one of the UK's top search engines.  G-Wizz, which is wholly owned, is the
UK's first free entertainment service provider.  It aims to attract
television viewers online by offering a range of exclusive television based
content.  Powerchannel, in which Granada Media has a 23.5 per cent. stake,
offers television viewers free equipment to access the internet through the
television in return for completing a brief monthly consumer survey.

Granada believes that consumers will increasingly want a wide range of
content, available on demand at the time of their choosing and personalised
to their specific requirements.   Internet businesses are currently
restricted in their use of video images because of bandwidth shortage. As a
result, although they offer an enormous range and choice of personalised
content, most of it is static and text based. Granada Broadband is developing
a range of businesses in education, health and sport, to meet the growing
demand for broadband services that marry the power and immediacy of
television images with the range of choice and flexibility of internet
services.  Granada Learning, for example, is already the UK's leading
provider of curriculum software to schools and is the leading publisher in
the home learning market.

Granada Media has used its extensive experience and understanding of the
television market to establish Europe's first digital terrestrial television
platform.  November 1998 saw the launch of ONdigital, a 50/50 joint venture
between Granada and Carlton Communications.  ONdigital is a subscription
television and interactive services platform that enables viewers to access
digital television and e-mail through a simple set top box and existing
television aerials. By the end of March 2000, ONdigital had over 670,000
subscribers.  ONdigital plans to launch full internet access by the end of
2000.  In the longer term, the Granada Directors believe that ONdigital is
well placed to benefit from the UK Government's decision, announced in
September 1999, to cease analogue terrestrial transmission of television
services by its target date of 2010.

Box Clever

In December 1999, Granada announced the agreement of a transaction to merge
Granada Technology's rental business with Radio Rentals, in a 50/50 joint
venture to be called Box Clever.  The Department of Trade and Industry
announced in April 2000 that it was prepared to allow the merger to proceed,
subject to the agreement of a number of undertakings as to how the business
operates.  The Granada share of the Box Clever joint venture will be
contained within Granada Media.

The Box Clever joint venture will be a leading player in the UK electrical
retail sector.  Granada Technology and Radio Rentals together currently
operate 41 distribution/service centres and 4 call centres in the UK, with a
total of approximately 2.4 million customers renting approximately 4 million
units.


3. The Proposals

It is intended that the proposals will be implemented in two stages.

3.1 The Merger

Terms

The merger between Granada and Compass Group will be implemented by means of
inter-conditional schemes of arrangement of both Granada and Compass Group
whereby a new company, Granada Compass, will be put in place above both
Granada and Compass Group with Granada shareholders and Compass Group
shareholders receiving shares in the new company in lieu of their Granada
shares or Compass Group shares on the following bases:

For each Granada share   0.7547 Granada Compass shares
For each Compass Group share  1 Granada Compass share

Appropriate proposals will be made to Granada preference shareholders in due
course.

On completion of the Merger, holders of Granada securities will receive
approximately 66.25 per cent. of the fully diluted ordinary share capital of
Granada Compass with holders of Compass Group securities owning approximately
33.75 per cent.  It is expected that the Merger will be completed by the end
of July 2000.

Granada shareholders will be entitled to receive the interim dividend
declared by Granada on 17 May 2000.  The record date for the payment of this
dividend will be 23 June 2000.  Compass Group shareholders will be entitled
to receive the interim dividend declared by Compass Group on 17 May 2000.
The record date for the payment of this dividend will be 21 July 2000.

The Schemes operate in a similar way to one another and will become effective
together.  In order for each Scheme to become effective, it requires the
approval by a majority in number representing not less than three-fourths in
value of the holders of the ordinary shares of that company present and
voting either in person or by proxy at a meeting convened by the Court.  In
the case of the Granada Scheme, it will also require approval by the Granada
preference shareholders by the requisite majority.  Each Scheme also requires
the relevant resolutions required to approve and implement that Scheme to be
passed as special resolutions at an extraordinary general meeting of the
company.  The meetings will be held on the same date.

Under the Act, the Schemes each then require the sanction of the Court.  Once
the necessary approvals from the Granada shareholders, the Granada preference
shareholders and the Compass Group shareholders have been obtained and the
other conditions to the Schemes have been satisfied or waived, the Schemes
will become effective upon the delivery of a copy of the orders of the Court
sanctioning the Schemes to the Registrar of Companies in England and Wales,
which is expected to occur at the end of July 2000.

The Merger is subject to the pre-condition that funding is arranged on terms
satisfactory to the Boards of Granada and Compass Group for the purposes of
the Merged Group. The documents relating to the Merger will be posted once
this pre-condition is satisfied.  The Schemes and the Merger are conditional,
inter alia, upon receipt of European Union competition clearance.  Full
details of the conditions to the Schemes and the Merger are set out in
Appendix 1.

Management

It is the intention of the Boards of Granada and Compass Group that the new
businesses to be created under the Proposals will, so far as possible, be
managed as separate entities by their own boards of directors from completion
of the Merger.  Details of the proposed boards for these businesses are set
out under section 3.2 below.

The Board of Granada Compass will have responsibility for overseeing the
implementation of the Demerger and will consist of 16 directors drawn equally
from the Boards of Granada and Compass Group. This board is initially
expected to comprise:

Granada                      Compass Group
Gerry Robinson (Executive    Francis Mackay (Joint
Chairman)                    Deputy Chairman and
                             Executive Chairman of
                             Compass Hospitality)
Charles Allen (Joint Deputy  Michael Bailey (Chief
Chairman and Executive       Executive, Compass
Chairman of Granada Media)   Hospitality)
Henry Staunton (Finance      Andrew Lynch (Corporate
Director)                    Development Director)
Graham Parrott (Commercial   Alain Dupuis (Executive
Director and Company         Director)
Secretary)
Stephanie Monk (Human        Ron Morley (Executive
Resources Director)          Director)
John Ashworth (Non-          Peter Cawdron(Non-Executive
Executive Director)          Director)
Richard Clothier (Non-       Denis Cassidy (Non-
Executive Director)          Executive Director)
Michael Orr (Non-Executive   Valerie Gooding (Non-
Director)                    Executive Director)

Nigel Rich is expected to become a non-executive director of Granada Media
prior to the IPO.

Prior to Demerger, the Board will comprise an equal number of Granada and
Compass Group directors.  Members of the Board will have one vote each with
the Chairman having the casting vote in case of deadlock, save in respect of
certain reserved matters such as acquisitions and disposals (other than the
possible acquisition of Carlton Communications or United News & Media),
appointment to or removal from the Board of Granada Compass and any matter
relating to the Demerger.

Gerry Robinson will be Executive Chairman of Granada Compass and oversee the
Proposals but will retire on the completion of the Demerger.  Thereafter he
will become a consultant to Compass Hospitality until his normal retirement
date and a non-executive director of Granada Media.

Dividend policy

If the Merger had been completed on 1 October 1998, the Board of Granada
Compass would have recommended a dividend for the year ended 30 September
1999 of 10.5 pence per share (equivalent to 8.0 pence per existing Granada
share and 10.5 pence per existing Compass Group share).

It is expected that, following Demerger, Granada Media and Compass
Hospitality will establish their own dividend policies appropriate to their
own strategies and business needs.

3.2 Separation

Following completion of the Merger, the Board of Granada Compass will put
proposals to its shareholders to implement a demerger of Compass Hospitality
from Granada Compass.  The Articles of Association of Granada Compass
anticipate that the Board will vote on proposals to put to shareholders
resolutions to effect the Demerger within twelve months of the completion of
the Merger.

The Boards of Granada and Compass Group have agreed key principles governing
how the Demerger will proceed.  These principles include asset and liability
allocation, debt allocation, employee and pension arrangements and management
of the demerged entities.

Management and Boards

The Executive Directors of Granada Media and Compass Hospitality are (in the
case of Granada Media, after the Demerger) expected to include the following:

Granada Media                Compass Hospitality
Charles Allen (Executive     Francis Mackay (Executive
Chairman)                    Chairman)
Steve Morrison (Chief        Michael Bailey (Chief
Executive)                   Executive)
Henry Staunton (Finance      Andrew Lynch (Finance
Director)                    Director)
Graham Parrott (Commercial   Alain Dupuis (Executive
Director and Company         Director)
Secretary)

Capital structure

The existing debt of Granada and Compass Group will be allocated to Granada
Media and Compass Hospitality in such a way as to provide each company with
the flexibility to pursue its own strategic goals.  Accordingly, immediately
prior to the IPO, Granada Media is expected to be capitalised with no net
debt.  All of the existing Granada and Compass Group net debt at that date is
expected to be allocated to or remain with Compass Hospitality.  At the end
of March 2000, the net debt of Granada was £1.9 billion and the net debt of
Compass Group was £1.1 billion.

Following this allocation of debt, Granada Media and Compass Hospitality will
be run autonomously pending Demerger and the levels of indebtedness in each
business on Demerger will therefore reflect the initial allocation of debt
and the cash flows relating to that business in the intervening period.

4. Convertible bonds

In connection with the Merger, proposals will be put to holders of the
Compass Group Convertible Bonds issued by Compass Group pursuant to a trust
deed dated 29 July 1997 (the 'Trust Deed'), that, pursuant to a court-
approved scheme of arrangement under section 425 of the Act, the Compass
Group Convertible Bonds be cancelled in exchange for an issue of 1349.528
Granada Compass shares for each £5,000 principal amount.  This exchange ratio
has been calculated on the basis of the conversion rate provided for in the
Trust Deed applying to conversions on or prior to 29 July 2000, being 370.5
pence per Compass Group share.

Implementation of the Compass Group Bondholders' Scheme requires the approval
of a majority in number representing not less than three-fourths in value of
the Compass Group Convertible Bondholders present and voting in person or by
proxy at a meeting convened by the Court.

The Proposals are not conditional on the outcome of the Compass Group
Bondholders' Scheme but the Compass Group Bondholders' Scheme will be run on
the same timetable as the Schemes.  If the Compass Group Bondholders' Scheme
is not approved at the court meeting by the requisite majority of Compass
Group Convertible Bondholders, the Compass Group Convertible Bonds carry the
right to convert into Compass Group shares.

Compass Group proposes to amend its articles of association so that if the
Compass Group Bondholders' Scheme is not approved by the requisite majority
of Compass Group Convertible Bondholders, or does not otherwise become
effective, the Compass Group shares to which Compass Group Convertible
Bondholders would become entitled upon any exercise of their conversion
rights after the effective date of the Merger will be compulsorily acquired
by Granada Compass in exchange for an issue of Granada Compass shares.  Under
the terms of the Compass Group Convertible Bonds and the amended articles of
association of Compass Group, any such conversion would be at the rate of
1297.017 Granada Compass shares per £5,000 of principal amount if conversion
takes place on or before 29 July 2001, at 1250 Granada Compass shares per
£5,000 principal amount if conversion takes place on or before 29 July 2002
and at 1204.819 Granada Compass shares per £5,000 principal amount if
conversion takes place thereafter until final maturity.

5. Financial information on Granada

Profit before taxation, digital television, new media and exceptional items
of Granada Group for the financial year ended 25 September 1999 was £835
million on turnover of £4,102 million.  Earnings per share (basic) before
digital television, new media and exceptional items for the same period were
32.9p.  The net assets and net debt of Granada Group as at 25 September 1999
were £2,291 million and £2,081 million respectively.

Granada Group's unaudited profit before taxation, digital television, new
media and exceptional items for the 26 weeks ended 25 March 2000 was £330
million on turnover of £2,080 million.  Unaudited earnings per share (basic)
before digital television, new media and exceptional items for the same
period were 12.8p.  The unaudited net assets and net debt of Granada Group as
at 25 March 2000 were £2,739 million and £1,927 million respectively.
6. Financial information on Compass Group

Profit before taxation and goodwill amortisation of Compass Group for the
financial year to September 1999 was £194 million on turnover of £4,815
million.  Basic earnings per share before goodwill amortisation for the same
period was 20.9p.  The net liabilities and net debt of Compass Group as at 30
September 1999 were £798 million and £1,066 million respectively.

Compass Group's  unaudited profit before taxation and goodwill amortisation
for the six months ended 31 March 2000 was £95 million on turnover of £2,657
million.  Unaudited basic earnings per share before goodwill amortisation for
the same period was 10.0p.  The unaudited net liabilities and net debt of
Compass Group as at 31 March 2000 were £706 million and £1,131 million
respectively.

7. Employees

The Directors of Granada and Compass Group believe that the Merger will
create exciting prospects for the employees of the Merged Group.  Existing
employment rights, including pension rights, of employees of Granada and
Compass Group will be fully safeguarded.

Appropriate proposals in respect of the Merger will be made in due course to
participants in the Granada and Compass Group share option schemes.

8. Settlement, listing and dealing

Application will be made to the UK Listing Authority for the Granada Compass
shares to be issued under the Merger to be admitted to the Official List.
Certificates for Granada Compass shares will be dispatched to Granada
shareholders and Compass Group shareholders who hold their shares in
certificated form (i.e. not in CREST) no later than 14 days after the
effective date of the Merger.  For Granada shareholders and Compass Group
shareholders who hold their shares in uncertificated form (i.e. in CREST),
Granada Compass shares receivable in accordance with the Schemes are expected
to be credited to CREST accounts no later than 14 days after the effective
date of the Merger.

Further details on settlement, listing and dealing will be included in the
documents to be sent to Granada and Compass Group shareholders.

9. Overseas shareholders

As regards persons resident in, or citizens of, jurisdictions outside the
United Kingdom (overseas shareholders), the Merger may be affected by the
laws of the relevant jurisdictions.  Such overseas shareholders will need to
inform themselves about and observe any applicable legal requirements.  It
will be the responsibility of overseas shareholders to satisfy themselves as
to the full observance of the laws of the relevant jurisdiction in connection
therewith, including the obtaining of any governmental, exchange control or
other consents which may be required, or the compliance with other necessary
formalities which are required to be observed and the payment of any issue,
transfer or other taxes due in such jurisdiction.

In any case where the issue of new Granada Compass shares would infringe the
laws of any jurisdiction outside the United Kingdom or necessitate compliance
with any special requirement, the Schemes will provide that such Granada
Compass shares may be issued to a nominee and then sold, with the net
proceeds of sale being remitted to the overseas shareholder.

The Granada Compass shares to be issued pursuant to the Schemes have not
been, and will not be, registered under the US Securities Act.  It is
anticipated that Granada Compass shares issued to persons within the United
States pursuant to the Schemes will be issued in reliance upon the exemption
from the registration requirements of the US Securities Act provided by
Section 3(a)(10) of that Act.

10. Further Information

Subject to satisfaction of the financing pre-condition, the formal
documentation relating to the Merger will be dispatched to Granada and
Compass Group shareholders as soon as practicable.  This documentation will
include the notices of the meetings of the Granada shareholders and the
Compass Group shareholders, full details of the Schemes and listing
particulars relating to Granada Compass, and will specify the necessary
actions to be taken by Granada and Compass Group shareholders.  The formal
documentation relating to the Compass Group Bondholders' Scheme will be
despatched to the Compass Group Convertible Bondholders as soon as
practicable subject to satisfaction of the financing pre-condition.

Neither Granada, nor any of its directors, nor, so far as Granada is aware,
any person deemed to be acting in concert with it, owns or controls any
Compass Group shares, or has entered into any derivative referenced to
securities of Compass Group which remains outstanding.

11. Recommendation

The Board of Granada, which has been so advised by Lazard, in its sole
capacity as financial adviser to Granada, consider the terms of the proposed
Merger to be fair and reasonable.  In providing advice to the Board of
Granada, Lazard has taken into account the Granada Board's commercial
assessments.

The Independent Board of Compass Group, which has been so advised by Schroder
Salomon Smith Barney, in its sole capacity as financial adviser to Compass
Group, consider the terms of the proposed Merger to be fair and reasonable.
In providing advice to the Independent Board of Compass Group, Schroder
Salomon Smith Barney has taken into account the Compass Group Independent
Board's commercial assessments.

The Board of Granada and the Independent Board of Compass Group consider that
the terms of the proposed Merger are in the best interests of their
respective shareholders as a whole and will recommend that their respective
shareholders vote in favour of the resolutions to be proposed at the court
meetings and extraordinary general meetings of Granada and Compass Group, as
appropriate, as they intend to do in respect of their own beneficial
holdings.


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