House of Commons - Public Accounts

Select Committee on Public Accounts Forty-Ninth Report

MANAGING THE SALE PROCESS

The over-optimistic valuation of the business

26. The Office of Public Service had responsibility for managing the sale and, at an early stage, commissioned their financial advisers, Coopers & Lybrand, to carry out a benchmark valuation of HMSO. This was completed in May 1996, prior to the receipt of indicative bids. The valuation was carried out on three different bases—sale, retention or break-up. It looked at three different scenarios for the prospects of the business—optimistic, central and pessimistic. The lowest value for the business if sold to a third party was expected at this time to be £71 million. The lowest value of the business if retained within the public sector was expected to be £47 million and the Office of Public Service told us that they would not have been prepared to sell HMSO for less than this (Figure 2).[24]

27. We asked the Office of Public Service why the £54 million sale price for the business was so far below even the most pessimistic sale valuation of £71 million. The Office of Public Service told us that both the Coopers & Lybrand valuations and the initial indicative bids were based on excessively optimistic views of the profitability of the business made by HMSO's management in late 1995. As the sale proceeded and bidders came to realise that the business was not as sound as they had initially believed, bids declined with final offers ranging from £6 million to £86 million compared with £25 million to £170 million initially (Figures 3 and 4).[25] We asked about the impact on value of the loss of financial and management control arising out of the implementation of the restructuring programme. The Office of Public Service told us that they did not believe that this was a major factor in the decline in the value of bids during the sale which they attributed to the underlying commercial weakness of the business.[26]

28. We further asked the Office of Public Service whether, if all the sale costs were taken into account along with the liabilities that the taxpayer had been left with, net proceeds would be greater than their reserve price of £47 million. The Office of Public Service told us that they believed the £54 million proceeds, less the costs of sale (advisers costs, payments to failed bidders, liabilities, and the £3.8 million paid over to the purchaser at the point of sale) would be higher than the £47 million valuation and therefore, in their opinion, the sale remained value for money.[27] They also said that many of the costs associated with the sale, such as advisers' fees, were sunk costs and had to be paid irrespective of whether the sale took place or not. They said that it would be wrong to take such costs into account when deciding on whether a sale at £54 million represented value for money against the reserve price of £47 million. Moreover, they believed that if a more realistic valuation had been carried out then the £47 million valuation of the business within the public sector would have been reduced.[28]

Lack of credibility of the Information Memorandum

29. A further key element in the sale process was the production of an Information Memorandum (the formal offer document which included key financial and other information about the business). This was also produced by Coopers & Lybrand and contained forecasts made by HMSO's management which were over-optimistic.[29] This led to higher bids in the initial round of bidding than justified, which were not sustained when further information became available to bidders.[30]

30. We asked the Office of Public Service why they had issued this Information Memorandum in March 1996, thereby sabotaging the value for money achieved in the sale, when they had been seriously concerned about the reliability of the information on which it was based in January 1996. The Office of Public Service said that their obligation at this stage in the sale process was to establish a good field of potential purchasers; the forecasts used were those of HMSO's management; the Office of Public Service had not believed at that stage that the forecasts were substantially too optimistic; and while they were concerned to ensure that the forecasts were realistic they did not want to push down the figures and depress the likely value of the sale proceeds.[31]

31. We therefore asked why the Office of Public Service had not checked management's forecasts for the business, in view of the problems with the Uzbekistan deal, losses in 1995 and a difficult trading environment. The Office of Public Service told us that they had invited management to take consultancy advice about the forecasts in their business plan, which resulted in reduced forecasts, and that they had therefore applied some scepticism to the numbers, although maybe not to an adequate extent. Trading performance in the first three months of 1996 had been in line with forecasts in the Information Memorandum. It was only in April 1996 that the business started falling back into loss and this became clear to bidders from June when they started their due diligence.[32]

32. Final bidders were surprised that the Long Form Report provided to them in May 1996 had differed in tone so markedly from the Information Memorandum which they had seen only some eight weeks earlier.[33] We asked whether the Office of Public Service agreed with bidders' sentiment that the tone of the Long Form Report differed so markedly from the Information Memorandum. The Office of Public Service told us that they believed bidders were overstating the difference. The Long Form Report was based on the same management forecasts as the Information Memorandum but as it was for a different purpose it included a number of cautionary comments about the quality of the financial controls within HMSO.[34]

The failure to maintain competition between bidders

33. The Office of Public Service wished to keep two final bidders interested in the sale on the basis that competition between the bidders would lead to the best price, and to act as a fallback in case the chosen bidder dropped out. In July 1996 the Office of Public Service were forced to choose a single preferred bidder which weakened their negotiating position in the two months prior to sale, particularly when the state of the business's finances allowed the preferred bidder to demand further concessions.[35]

34. We therefore asked why the Office of Public Service had allowed themselves to get into this poor negotiating position. They said that at the final bidding stage they took steps, on professional advice, to keep four bidders in the field by offering to pay up to £100,000 to each of the unsuccessful bidders. They wished to keep two bidders in the process throughout the sale but they had been faced with one bidder who, because of the very high bidding costs, would only remain in the sale if given exclusive negotiating rights. The Office of Public Service were therefore obliged to choose between the two. This left them in a position of either having to accept the National Publishing Group's offer or to abandon the sale.[36]

35. We asked why, taking into account the problems with the business and faced with this situation, the Office of Public Service had not approached Ministers to say that they were in an unacceptable bargaining position. The Office of Public Service told us that pulling out of the sale was always a possibility when set against the £47 million reserve price. Had the price fallen below this the Office of Public Service would have sought a direction from Ministers to proceed with the sale.[37]

36. During negotiations in August 1996 the National Publishing Group reduced their final offer of £86 million, first by £17 million to £69 million, and then by a further £15 million to £54 million.[38] We asked why there was disagreement between the Office of Public Service and the purchasers of the business over different accounting conventions leading to a £17 million reduction in the price. The Office of Public Service told us that it was natural in negotiations for purchasers to argue that assets were overvalued and that in this case the National Publishing Group had adopted cautious accounting conventions. We also asked about the further £15 million reduction. The Office of Public Service told us that both parties wanted to complete the deal quickly and so they had accepted an offer from the National Publishing Group to accept all the remaining uncertainties surrounding the business in return for the £15 million reduction in the bid price.[39]

The decision to cease payments to suppliers

37. On 20 September 1996 HMSO, with the agreement of the Office of Public Service, decided to cease payments to suppliers, contrary to the undertaking that had been given to the National Publishing Group only 10 days earlier to trade normally.[40]

38. We asked the Office of Public Service why they had been unable to foresee that this would happen. They told us that HMSO had a £50 million statutory borrowing limit, of which a significant part had been used up during 1996 in funding a voluntary redundancy programme. It was also facing one of its worst seasonal cashflow periods and it was clear to the Office of Public Service and the purchaser that the business would not be able to continue to pay its bills without breaching the £50 million limit. As a result the Office of Public Service agreed with the National Publishing Group that all unpaid supplier invoices would be transferred to The Stationery Office in return for the accompanying transfer of all cash, some £3.8 million at 30 September, which would otherwise have been retained by the Office of Public Service.[41]

39. We further asked why the Office of Public Service had decided to sell the business in the very period of its worst cashflow. The Office of Public Service told us that the problem had been one of short-term working capital requirements, which fluctuated at various points of the year and they did not consider that a sale at any other time would have made a difference to the decision to hand over the cash balances of the business.[42]

Consideration of provisions to clawback profits if the business were sold on

40. The National Publishing Group's bid was in cash, but the rival bid from Capita included a share of any profit made in the event that The Stationery Office was floated on the stock market.[43] We asked whether the Office of Public Service would receive any clawback of additional proceeds should the National Publishing Group decide to sell it. The Office of Public Service told us that in this case clawback applied only to property disposals and not to profits from any future sale of the business. We questioned the Treasury about their guidance on profit clawback. They told us that having clawback arrangements could depress the price in certain circumstances and the vendor had to judge whether to have a lower price with a clawback or a higher price without.[44] We further asked the Office of Public Service, given the profits being made by The Stationery Office under private ownership, whether the bid from Capita with its offer of a share of flotation proceeds would have represented better value than that from the National Publishing Group. The Office of Public Service told us that while it was not possible to say how much they might have received if they had accepted the Capita bid they believed that Capita would have reduced their bid during final negotiations by a similar amount to the National Publishing Group, and for the same reasons.[45]

Treatment of staff

41. At meetings with final bidders in June 1996, the HMSO's trades unions had understood that redundancy levels would be around 500 to 600 over two to three years. The final bids for the business, submitted in July 1996, showed proposed redundancies ranging from 440 to 900 staff. Since privatisation, the National Publishing Group have made almost 1,000 staff redundant over a period of nine months.[46]

42. We therefore asked whether staff had been treated fairly and their rights respected in the decision to sell the business to the National Publishing Group. The Office of Public Service told us that the redundancies following the sale had been predicted in 1994. It was anticipated at that time that some 900 staff would need to leave the business between 1994 and the later years of the decade. These had been brought forward by the new owners.[47]

Liabilities

43. During negotiations between the National Publishing Group and the Office of Public Service it was agreed that some liabilities would remain with the Office of Public Service.[48] The Office of Public Service told us that they had accepted liabilities only where they had judged it better than to try to have them discounted in the sale price. They also provided updated information on the status of the liabilities incurred.[49]

Advisers' fees

44. The Office of Public Service's financial advisers, Coopers & Lybrand, found that they had to undertake more work than they had anticipated and their fees rose from £382,500 to £679,000. This latter figure was capped which avoided the Office of Public Service having to pay an additional £140,000 (excluding VAT) that would otherwise have been payable.[50]

45. We asked whether the Office of Public Service obtained value for money from Coopers & Lybrand especially since they had based their valuation on over-optimistic forecasts produced by management and had been responsible for the production of the over-optimistic Information Memorandum. The Office of Public Service considered that Coopers & Lybrand had performed competently and that the range of indicative bids at £25 million to £170 million had been in the same range as the £47 million to £174 million valuation.[51]

Conclusions

46. At an early stage in the sale bidders had been concerned about the quality of the information coming from the business. In the final stages of the sale the National Publishing Group reduced their bid by £32 million, from £86 million to £54 million in part because of doubts about HMSO's financial position. We do not therefore accept the Office of Public Service's view that the impact of the loss of financial control in the run up to the sale was a relatively minor factor in the progressive decline in bids.

47. We note the Office of Public Service's view that the sale represented value for money. We criticise them, however, for not taking into account all the costs and liabilities associated with the sale when considering whether or not to proceed with it. We note that the £54 million sale price was very close to the reserve price of £47 million, below which the Office of Public Service would not have been prepared to sell. Even at best, on the evidence given to us by the Office of Public Service, the total receipts from the sale only exceed the reserve price by around £3.8 million. When those liabilities which are at present unquantifiable are taken into account, for example employee liabilities, it is unclear whether the sale represented value for money.

48. The Office of Public Service their financial advisers, Coopers & Lybrand, gave bidders over-optimistic forecasts of HMSO's future performance. These forecasts were drawn from HMSO's business plan which they knew was over-optimistic. The HMSO forecasts, on which the Information Memorandum data were based, were overestimated and the Office of Public Service failed to persuade HMSO to give them realistic figures. Treasury guidance advises departments that business plans should not be over-optimistic and open to misinterpretation. The Office of Public Service only fully realised HMSO's true position when there were a limited number of bidders left in the competition. The Office of Public Service's negotiating position was weakened as a consequence.

49. It is a measure of the failure of the Office of Public Service that they did not have sufficient understanding of the business to establish that HMSO would be forced to suspend payments to creditors, resulting in their having to reverse the arrangement made only ten days earlier with the purchasers that the Office of Public Service would retain cash balances in the business.

50. We are also concerned that the Office of Public Service paid £300,000 to three unsuccessful bidders to keep them in the sale process, but were unable to prevent the National Publishing Group having a two month exclusivity period as preferred bidder. During this period the National Publishing Group secured a £32 million reduction in their final bid price of £86 million.

51. We are not convinced that the Office of Public Service obtained full value for money from their financial advisers, Coopers & Lybrand. Two key documents prepared by the firm—the valuation of the business (upon which the Office of Public Service judged whether the sale represented value for money) and the Information Memorandum (upon which inflated initial bids were submitted)—were based on over-optimistic information from HMSO management which was not subject to effective challenge by Coopers & Lybrand.

24 C&AG's Report paragraph 3.5 and Figure 8 Back

25 Qs 2, 94 and C&AG's Report Figures 9 and 12 Back

26 Qs 19, 60 Back

27 Qs 27-28, 152-155 and Evidence, Appendix 1, pp 25-27 Back

28 Q 160 Back

29 Qs 2, 5, 54, 57 Back

30 C&AG's Report paragraphs 16 and 2.10 Back

31 Qs 5, 46-48, 52-54, 57-60 Back

32 Qs 5, 127 Back

33 C&AG's Report paragraph 2.9 Back

34 Qs 180-182, 211-212 Back

35 C&AG's Report paragraph 3.28 Back