Examination of witnesses (Questions 200 - 219)
WEDNESDAY 3 JUNE 1998
MR A JUKES, MR S ANDERSON and DR J PRIDEAUX
200. Can you tell us Mr
Jukes?
(Mr Jukes) No. It certainly was
a significant sum. It was within the cash flows which we discussed
earlier. It could be provided to the Committee if that were requested.
Chairman: The Committee would like
a note from each if possible on the size of that value[9].
Mr Clifton-Brown
201. Could you also both answer the same
question which I asked Dr Prideaux on warranties? How much would
that have increased your bid had the Government taken on the warranties
that were requested by Dr Prideaux at that time, the sort of warranties
which are mentioned in the report? Did you consider that at the
time and if so would it have increased your bid?
(Mr Anderson) It was not an issue
we considered.
(Mr Jukes) We had some protracted
negotiations on purchase agreement and issues in this area were
part of that negotiation. It is clear from the NAO report that
that too had an impact on the price. The terms we finally settled
certainly involved a reduction of £10 million and I think
it may have been £20 million in the end for issues around
the terms of the deal.
202. Dr Prideaux, could I ask you to put
an overall global figure on all these issues, that the Government
received less money than they should have done because of these
particular issues, in so far as the amount which was accepted
was less from the management buyouts, the secondary leases, the
political risk and the warranties? What would that figure amount
to in total?
(Dr Prideaux) I am guessing. I would
merely say in terms of the political risk question you have raised,
that if other big players had been in the market I would have
expected them to have bid at much the same sort of level as we
bid. If that is roughly £100 million per company more than
an MBO would have been able to bid I would have thought that was
quite fair.
203. Could you put a total global figure
on those four categories?
(Dr Prideaux) Warranties £75
million, some other procedural matters £50 million and £75
million again, I do not know, of that order. The final category,
secondary leases, were fully valued in our bid anyway.
204. Would it be fair to say that of the
known factors, adding those figures up, we are looking at something
like about £500 million known factors, that the Government
could have obtained more for these companies?
(Dr Prideaux) If the overall level
of risk had been perceived by the market to have been different,
if the procedures had been different in the way you had arrived
at, then that is quite a tenable conclusion. In a sense it is
an extraordinarily difficult number to arrive at. Clearly the
number would have been more than the numbers which were finally
bid.
Mr Davies
205. Dr Prideaux, I notice your glistening
CV, which I assume you wrote yourself. Given the strength of your
CV, did you find in a negotiating situation with Hambros in terms
of weighing up what was a reasonable price that you had a great
deal more authority on these things than the people selling you
the assets? Was that your view?
(Dr Prideaux) The people selling
us the assets? How do you mean?
206. In terms of the original purchase.
Hambros floated various indicative prices and bids and obviously
got feedback from prospective buyers. In that process, would you
say you were matched in terms of people you were talking with
or would you say you were a person with a great deal more authority
in the railway industry?
(Dr Prideaux) I would have said
that the people we dealt with at Hambros were thoroughly professional
throughout.
207. In this process, did you systematically
talk down the opportunities for cost reductions after you took
over the business with a view to reducing the price you had to
pay?
(Dr Prideaux) It was not a negotiated
process of the sort you are describing with Hambros. The essence
as far as the consortium was concerned-and if my experience of
the railway industry was helpful it was within the consortium-was
how much money we could possibly afford to bid for this company
with the comfort of the backers and against an expectation that
there were other very significant players still in the market.
That is how we arrived at a price. It was essentially a bid which
was delivered to Hambros. It was not a process of private negotiation
between Hambros on behalf of the Government and ourselves. It
was a bid they had which they then either accepted or rejected.
208. Perhaps I can ask Mr Jukes a similar
question. My understanding is the indicative bid we are talking
about originally from you was something in the order of £850
million and the final bid came down to something like £580
million. Was that again part of the process of your expertise
against the expectations internally, given the political pressure
to sell this off successfully? Was there in effect a process of
bidding down or pushing down the price that the taxpayer received?
(Mr Jukes) No, absolutely not. What
may not be clear and I do not think it is clear from the report,
is that the indicative bids and the final bids were on a very
different basis. There was a different assumption of when the
company would be sold. It may sound a little bizarre for indicative
bids put in at the beginning of July but there was an assumption
that the sale would be completed on 1 April 1995 so effectively
the full cash flows from 1 April 1995 onwards were part of the
indicative bid. Similarly the cash which is mentioned in the report,
some £800 million across the three companies, was part of
the indicative bid but was not part of the basis for the final
bid. Additionally the Networker Express trains, which we have
already mentioned, were left out of the indicative bid but formed
part of the final and in total those changes fairly accurately
account for the change in our bid level.
209. How surprised were you at the rate
of appreciation of Eversholt?
(Mr Jukes) Very surprised. We went
into this with backers, albeit venture capitalists, but with an
expectation that the exit for the company would be a sale or flotation
in three to five years' time and we had been looking for our backers
to give positive support to a longer timescale because we believed
that would be necessary. When the Porterbrook sale took place
and others were clearly interested in buying the company, we were
surprised but we naturally responded to that situation.
210. Your investment of £110,000 to
make £15.9 million. At the time what proportion of your wealth
was £110,000?
(Mr Jukes) That would be difficult
to answer.
Chairman: I do not think that is
necessarily appropriate.
Mr Davies: The point is that if it
was half of his wealth it would indicate that Mr Jukes thought
there was a very, very good chance of maximum appreciation. What
he suggested is that he did not think that.
Chairman: I will allow Mr Jukes to
answer whether it was significant if he wants to.
Mr Davies
211. Was £110,000 a significant proportion
of your wealth?
(Mr Jukes) It would have been very
uncomfortable to have lost that much money, that is for sure.
212. Mr Anderson, you must be slightly disappointed
because Mr Souter came in here and said that Porterbrook is now
worth £1 billion. Presumably you think you should have held
on and made even more money. Is that right?
(Mr Anderson) Absolutely.
Chairman
213. Could you let us have a note outlining
those differentials in the reduction from indicative to final
price[10]?
You gave it us very eloquently but it would be useful to have
a note on it.
(Mr Jukes) It is on the record with
Hambros in fact because we were asked that question on 3 October
1995. I will provide that.
Chairman: We should like to see that.
Thank you very much.
Jane Griffiths
214. Quite a lot has been said about the
personal investment which Mr Jukes and Mr Anderson made and the
large return on it. May I just ask another question about that?
Forgive me. It seems that capital gains tax is very easy to avoid
on investments like this and on income like this. Did you pay
capital gains tax?
(Mr Jukes) The bulk of the £15.9
million realised at sale has at this stage for my part been re-invested
in Forward Trust. I follow what is the process encouraged by the
way the tax rules are structured to retain my investment in the
company potentially for the longer term. Clearly that does for
the time being reduce the amount of capital gains tax payable
today. When the gain is finally realised, tax will be payable.
215. At the time when the sales were made,
was the future of the rolling stock considered in detail? I am
referring particularly to the old Mark 1 rolling stock. I do not
know how much of that stock is held by each company but the Health
and Safety Executive has recommended that Mark 1 rolling stock
be phased out in the interested of safety and there would be considerable
cost involved in that I should imagine. Would you comment on that?
(Mr Jukes) At the time the companies
were set up leases were put in place between each company and
the train operating companies for all the rolling stock which
was at that time in service. Assumptions were made about how long
those leases would be. On the part of Eversholt we had and still
have something like 500 vehicles of the Mark 1 type. Leases were
put in place in 1995 that would run-I think the longest-to 2002.
There may be some out to 2004 but that was something which was
understood between all parties to the process, OPRAF, HSE and
so on.
(Mr Anderson) My comment would be
similar to Mr Jukes. We were given leases on these vehicles. We
have already placed orders to replace some of these vehicles which
was fairly well publicised. In South West Trains and other places,
LTS, etcetera, we actually put up money to replace these.
(Dr Prideaux) It is a very important
point. Our view is very clearly that the best future for Angel
is one where the railway industry grows rapidly and provides a
very satisfactory service to its clients. Right from the process
of bid we had concerns about how we could improve Mark 1 rolling
stock, not simply because of safety concerns, but because of the
attitude of customers to travelling in relatively old stock. What
we have done is, at our own speculative cost, build a replacement
vehicle which uses a lot of components from Mark 1 coaches, the
best of the existing ones, because some of them are not really
very old, which is called the Classic and that has been trialled
and has been shown to over 20,000 people so far. We should very
much like to move to a position where some of our customers in
the train operating companies who operate our longer life Mark
1 stock were able to place orders to convert those Mark 1s into
Classics.
216. May I return to my earlier question,
the question about capital gains tax? Did I get a reply from you,
Mr Anderson on that?
(Mr Anderson) My position on the
capital gains tax is that I took a substantial part of my paper
position in Stagecoach shares and they are still in Stagecoach
shares. I am working to make sure that Stagecoach shares increase.
That is a calculation anybody would make. They take a decision.
I am still working with Stagecoach and these shares are still
in Stagecoach.
Mr Love
217. After his performance earlier on this
afternoon that might be quite a good investment. Mr Jukes, earlier
on you said in terms of the value of the company when you were
coming to measure it that you put up the maximum you could. Mr
Anderson, you said you put up as high a price as you could. To
what extent was that pressure, the pressure of what you thought
was a competition from others, tending to push the value that
you wanted to offer for the companies.
(Mr Jukes) It is important to remember
that in a well run competitive auction the individual bidders
had no knowledge of who else was bidding, how many others bidders
there are, what they might be bidding. It is a blind process in
which—
218. May I stop you there because what I
am really trying to get at is that the report goes into great
detail about the mechanisms and the criteria that it was supposed
you used to value the company. The question I am asking is: was
it a much simpler process? You valued it at what you thought would
perhaps win it, up to the maximum that your backers were prepared
to go.
(Mr Jukes) That is correct.
219. Let me rephrase that. I do not think
I am getting through. The way that the NAO and indeed Hambros
when they came to try and evaluate how the bids came out as they
did, worked was to make assumptions about what values to put on
different things within the companies. You will have gone through
that process obviously. What I am asking you is whether that was
the process which helped you to reach the final decision or was
it a much simpler process of being in a competitive ballot and
wanting to bid at a level that you thought might win you the bid?
(Mr Jukes) There is a whole range
of factors which go to decide the final price which a group of
people is willing to bid. Certainly the kind of analysis in the
NAO report, but not identical because there were other factors
from our perspective, is part of that but very important is the
whole environment, the feeling about the risks, the uncertainties.
In the end the group of people needs to come to a view as to what
number they are comfortable with and it needs to be as high as
possible.
9 Note: See Evidence, Appendix 1, page 52 (PAC 352),
see Evidence, Appendix 2, page 53 (PAC 349) and also see, Evidence,
Appendix 3, page 53 (PAC 335). Back
10
Note: See Evidence, Appendix 1, page 52 (PAC 352). Back
| 
