Examination of Witnesses (Questions 40
- 59)
WEDNESDAY 10 DECEMBER 1997
MR R SPENCE,
MR R WARBURTON,
and MR E TRACEY
MR S QUINN
40. Will you now tell the Committee who
those two bidders were?
(Mr Dowdall) Yes. They were two local consortia:
one was called Airports Europe and the other SARCON Diamond. They
were made up of local businessmen.
41. Are you able to say from your investigations
whether either of those companies have had any dealings directly
or indirectly with the TBI Group? I have the TBI's Excel card
here and I find it very interesting indeed. Have they had any
dealings directly or indirectly to your knowledge?
(Mr Dowdall) To my knowledge no. That is probably
the wrong way to put it. I know nothing of their dealings.
42. Which suggests to me that you have not
actually prodded in that direction at all.
(Mr Dowdall) That is quite right.
43. Do you not think it is something which
should have been done?
(Mr Dowdall) Because they were unsuccessful bidders,
I had little interest in them once they had dropped out of the
bidding. Because TBI were a private company which had bought the
assets at second hand, I did not pursue the interest with them
either.
44. What smells to me as an old businessman
is that everybody has come in at a price just in the same ballpark
as the management. You are telling us that the management are
like Caesar's wife but they were actually only dealt out of this
thing for a matter of months. They knew what the cashflow looked
like. They knew what assets had been invested. They had the whole
thing lined up. They thought they had even dictated the ground
rules. When they found that the ground rules were marginally changed,
they dropped their price and hey presto, where did they drop their
price, they dropped it to within a convenient £900,000 [6]
of the next highest bidder. The thing stinks. Does it not to you?
(Mr Spence) We are satisfied that the process
we went through to sell the airport was conducted properly and
the Audit Office's analysis of the situation confirms that.
45. Let me challenge both of you on that.
C&AG, you have produced a financial summary of the history
but you just put in net assets. There are dogs which do not bark
in this whole report. You do not, because it is not your remit
I suppose, go into any explanation of how TBI justified to its
shareholders the price it paid. It is a listed company. It must
have produced a class 1 circular, it must have given its reasons
and justified the price to those shareholders. Those reasons are
relevant to this Committee because they might throw some light
on the discrepancy between the value they put on it within 24
months or thereabouts of the valuation that Touche Ross put onto
it. Let me ask Touche Ross. In the C&AG's report you will
find a figure for net assets over three or four or five years.
What you do not have anywhere is a balance sheet. What you have
throughout this whole exercise, so far as we can glean, is Touche
Ross saying it should be valued on the basis of profits, put a
PE multiple on it. For heaven's sake, Mr Tracey, you must have
known that by the time you came to write this report there were-countless
is an exaggeration-many examples of taxpayers' assets sold by
a Government bent, for good reasons so far as I am concerned,
on privatisation, but a Government whose advisers had time and
again overlooked the underlying asset value. Why was your valuation
on the basis of earnings, on a PE multiple, why was it not on
assets? Is it not strange the C&AG has not provided us with
a detailed balance sheet in here which would have given us some
clues as to what TBI found interesting?
(Mr Tracey) We certainly explained the concentration
on earnings in our valuation report and discussion paper. [7]We
rejected that as an appropriate basis of valuation. We were of
course aware that there would be clawback on any property sale,
as had become regular post your examination of Royal Ordnance.
46. Royal Ordnance was one I was going to
throw at you. It is just glaring.
(Mr Tracey) Post that, it became standard practice,
as indeed was done here, to have property clawback, which we believe
was absolutely appropriate and did not take any issue with that.
We believe the earnings basis of the valuation was the appropriate
basis. We were valuing an ongoing airport and we think that was
an important thing.
47. Forgive me for interrupting. Are you
telling me that there is any commonsense civil servant or financial
adviser or anyone else who could not walk that airport and say
what is leaping out at us here are assets capable of being re-
developed? Forget the red herring and the rather smelly business
about the hotel. There were freehold assets there which were ripe
for development. Look at the infrastructure which leads into an
airport. Look at what TBI did in Cardiff. Think what they have
been doing in Orlando with their latest acquisition. Think what
has happened with other Government assets sold. Why did you not
focus on that? Because the Treasury said it was not important?
(Mr Tracey) No, not at all. They had not done
their stuff in Cardiff; they did not buy Cardiff until 1995.
48. There were obvious lessons to be learned
which must have occurred to you if they occurred to them.
(Mr Tracey) We had an asset-based valuation which
we referred to in our 29 April paper. We must go back to the circumstances
in which these valuations were done. All of the uncertainties
about profits at the time were downside. Before there was not
in any of our even wildest speculations about the future the notion
that there would be peace or peace talks in Northern Ireland.
That makes an enormous difference.
49. With the greatest possible respect,
part of that may be the case but it is also a red herring. I can
remember a session of this Committee towards the end of the last
parliament where I was accusing those involved of throwing money
around like it was going out of style in Northern Ireland and
I suspect that is the culture. You ruled out a flotation, you
ruled out an institutional placing. Why, for heaven's sake? If
this was an asset-rich balance sheet, which the C&AG has not
presented for us, if that was the case, surely the most equitable
thing to do would have been to give small investors, with preference
for small investors in Northern Ireland, the chance to own this
thing rather than handing it over lock, stock and barrel to management,
who dealt it on. Why did you rule that out?
(Mr Tracey) We ruled it out in our report in 1993
on a number of grounds, not least of which was that we thought
the scale of this company was really rather small, the stock market
would not give enough value to it, there would be a discount on
flotation, there were not many companies of this sort and in the
circumstances of all of our worries-and we had a number-about
the future of this company in terms of airlines pulling out, we
thought that it would not raise the same amount of value.
Mr Wardle: Thanks to all your conscientiousness
and worries you got some very, very rich former officials who
were employees of this setup and you got the taxpayer singing
for £70-odd million less a little bit. Something has gone
badly wrong.
Ms Maria Eagle
50. I should like to speak mainly to Mr
Spence as he is the Accounting Officer. I find it interesting
that Touche Ross are here today. I want to look further at the
valuation you put on this airport. Would you accept that whatever
your justification for the figure you came to, it was badly out,
was it not? Your valuation of the airport was badly wrong if the
new owners were able to sell it as such a massive profit within
two years, was it not?
(Mr Spence) No, that is not right.
51. You do not accept that.
(Mr Spence) I do not think the facts would contradict
me here because the value of the airport was determined by the
market; that is what people were prepared to pay for it.
52. I find it interesting that you do not
accept that. Let us move on. Paragraph 3.4 looks at how the valuation
was done. It says, "... the preliminary valuation ... took
no account of the scope for efficiency improvements". We
have heard from some of my colleagues of other things which were
missed out like the assets, which is rather a big omission in
my view, but the report mentions some smaller things which were
missed out. The scope for efficiency improvements were not taken
into account. Then it seems to me that Touche Ross spent the rest
of their time on this job being paid by your Department to advise
and assist the company to increase its value. If we look at paragraph
3.6, paragraph 3.7, what they say to me is that you are paying
Touche Ross to do a job for the airport board. Why is that?
(Mr Spence) It was our responsibility to ensure
that the airport was run as efficiently as possible. The Hambros
report in 1991 [8]
had identified scope to make major efficiencies.
53. But you did not take them into account
in valuing the airport.
(Mr Spence) Yes, we did.
54. It says in paragraph 3.4 that the valuation
took no account of the scope for efficiency improvements. Even
though Touche Ross then spent subsequent time advising the airport
about how to increase their value by efficiency savings; mainly
sacking 25 per cent of the workforce it seems to me.
(Mr Spence) There is confusion here. In paragraph
3.4 the preliminary valuation is the valuation Hambros made in
1991 to give us a preliminary view of what the airport would be
worth. The valuation on which we based the sale was the valuation
which Touche Ross carried out.
55. What was the difference between those
two valuations?
(Mr Spence) In 1991 Hambros valued the airport
in the range of £25 million to £30 million. Three years
later Touche Ross put a figure of £27.5 million to £32.5
million as the value.
56. It is similar or down slightly.
(Mr Spence) It is slightly up.
57. Even though you had these efficiency
savings. Are you seriously telling me that you did take into account
the efficiency savings and then the value went down or did not
change very much?
(Mr Spence) You are talking about a period here
where terrorist violence was still very high.
58. Do you think that is the explanation?
(Mr Spence) No, it is not at all. It is one of
the factors. There was the Gulf War, the Lockerbie bomb, all factors
which would have tended to depress the price of Belfast International
Airport. When the airport was sold again two years later, after
the MEBO bought it in 1996, we had a quite different situation
because there was then a peace process under way in Northern Ireland
which has made a major difference to people's view of the future
of the area.
59. That is very convenient for the management
buy-out.
(Mr Warburton) May I supplement that with an explanation
of the striking similarity between the valuations and show how
they are actually different? [9]
6 Note: See Evidence, Appendix 1, page 16 (PAC 103). Back
7 Note:
See Evidence, Appendix 1, page 16 (PAC 103). Back
8 Note:
See Evidence, Appendix 1, page 16 (PAC 103). Back
9 Note:
See Evidence, Appendix 1, page 16 (PAC 103). Back
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