House of Commons - Public Accounts

Select Committee on Public Accounts Sixty-First Report

PART 2: EXAMPLES UNDERLINING KEY LESSONS FROM REPORTS BY THE COMMITTEE OF PUBLIC ACCOUNTS

15. MANAGEMENT BUY-OUTS

Securing Fair Competition

DEPARTMENT OF EMPLOYMENT (NOW DEPARTMENT OF EDUCATION AND EMPLOYMENT): SALE OF THE SKILLS TRAINING AGENCY[67]

i. In May 1990 the Department sold seventy five per cent of the Agency's skill centres to a management buy-out team for a negative consideration. Our predecessors were concerned in examining the sale to establish that the management buy-out team did not have an advantage because of their knowledge of running the Agency. They noted the Department's assurances that the management buy-out team were treated on exactly the same footing as every other bidder. The Department said that they had taken measures to avoid risks in relation to the management buy-out team and were satisfied that the team had no more idea than anybody else about the price and had played no part in major decisions concerning the disposal of the Agency.

DEPARTMENT OF TRADE AND INDUSTRY: THE SALE OF THE BRITISH TECHNOLOGY GROUP[68]

ii. In selling this company in 1992, the Department were concerned to guard against the management-led consortium having greater access to information than the other bidders. They introduced rules and procedures which addressed this concern by providing independent supervision of meetings and correspondence between management and their consortium partners, with arrangements to make all information distributed to the consortium members available to other bidders. The Department assured our predecessors that they had been particularly careful to try to put the management-led consortium, as far as possible, on an equal footing with other bidders. The Committee pressed the Department on whether it could ever be true to say that there was equal disclosure when the company's management were involved in one of the bids. The Department said that they had taken all steps that were feasible to control and monitor the flow of information but that, in the last resort, a degree of trust had to be placed in the standards of conduct of the parties. The Committee concluded that it was an important principle that all serious bidders should, as far as possible, be given as much information as is needed to ensure that there is fully informed competition among bidders. The Department agreed with this conclusion and said that, where management participation in a bid occurred, they tried to release as much information as possible to ensure fairness.

DEPARTMENT OF TRANSPORT (NOW DEPARTMENT OF THE ENVIRONMENT, TRANSPORT AND THE REGIONS): BRITISH RAIL MAINTENANCE LIMITED: THE SALE OF MAINTENANCE DEPOTS[69]

iii. In this sale of seven British Rail maintenance depots in 1995, our predecessors regarded as serious flaws in the sales process, breaches in the procedures relating to the provision and recording of information to bidders which meant that all bidders did not receive the same material information, including financial forecasts. As a result there was no assurance that some bidders did not have unfair advantage over others. The Committee recommended that, particularly where, as in this case, external bidders were in competition with management buy-out bidders, departments should ensure that vendors have arrangements in place to secure equal provision to bidders of all material information about the business to be sold and the sale process. The Department agreed that these breaches should not have occurred and accepted the Committee's recommendation.

DEPARTMENT OF TRANSPORT (NOW DEPARTMENT OF THE ENVIRONMENT, TRANSPORT AND THE REGIONS): PRIVATISATION OF THE ROLLING STOCK LEASING COMPANIES[70]

iv. In February 1996 the Department completed the sales of the three rolling stock leasing companies, realising total gross proceeds of almost £1.8 billion. In the event, there were only four bidders for the three companies—one external bidder and three management and employee buy-out teams. We were concerned that the presence of management/employee buy-out teams discouraged at least one other bidder who, in the absence of support from the management, considered itself at a disadvantage. Private sector vendors now often require management to work equally with all bidders initially, allowing them to link-up only with the vendor's eventual preferred bidder. We recommended that, for future public sector sales, the Department should consider whether this approach would be appropriate.

Use of Incentives

DEPARTMENT OF TRANSPORT (NOW DEPARTMENT OF THE ENVIRONMENT, TRANSPORT AND THE REGIONS): THE FIRST SALES OF TRUST PORTS[71]

v. One of the Department's objectives in these sales was to encourage employee participation in the equity capital of the ports sold. Management buy-out teams were involved in bidding for four of the five ports sold in 1992, (the fifth was privatised by flotation), and were successful in three of the sales. The Department did not specify what price preference the vendors might give to management buy-outs, raising questions as to whether this might have deterred some potential buyers. There were also significant differences in the amounts of support given by the vendors to assist management buy-out teams in mounting their bids. Our predecessors welcomed the Department's intention in future sales to set clear limits on the price preference to be given and on the financial assistance available to assist management buy-out teams in preparing their bids. These will be specified in revised Notes for Guidance for any future sales.

DEPARTMENT OF TRADE AND INDUSTRY: THE SALE OF THE BRITISH TECHNOLOGY GROUP[72]

vi. In negotiations leading to the completion of the sale of this company to a management-led consortium in 1992, the Department, following Treasury guidelines that there should be no public support for such a bid if it was successful, refused the consortium's request for a contribution of £650,000 towards the costs of putting forward its bid. Our predecessors noted, however, that they subsequently accepted a retrospective reduction of £550,000 in the consortium's bid to take account of its costs. Despite evidence from the Department and Treasury that this arrangement was compatible with Treasury guidelines not to contribute directly to the winning consortium's costs, they considered it a rather artificial device and recommended that the Treasury guidance should take account of indirect financial support of this kind.

DEPARTMENT OF TRADE AND INDUSTRY: THE SALE OF THE BRITISH TECHNOLOGY GROUP[73]

vii. This business was sold to a management-led consortium in 1992 for £2.65 million less than the highest bid. The Department's objectives for the sale were to maximise the net return to the taxpayer consistent with a good prospect for the continuation of the company's technology transfer activities. Our predecessors noted that the preference for the lower bid was seen by the Department as a fair price to pay in support of their view that, with the greater involvement of management and employees in the success of the business, there was a better prospect of a genuinely independent future for the company. The management-led consortium bid seemed to the Department to offer greater assurance of continued service in promoting technology transfer to industry in the United Kingdom.

Securing the Best Proceeds

DEPARTMENT OF EMPLOYMENT (NOW DEPARTMENT FOR EDUCATION AND EMPLOYMENT): SALE OF THE SKILLS TRAINING AGENCY[74]

viii. Seventy five per cent of the Agency's skill-centres were sold to a management buy-out team in 1990. The sale terms included claw-back provisions in respect of freehold and long leasehold properties which would give the Department a share of any gains from their disposal or development for 10 years after the sale. Our predecessors were pleased to note that the taxpayer would share in future gains from property sales and that this provision would apply to any subsequent purchasers. The Department said that they had imposed claw-back provisions in the light of previous recommendations from the Committee.

SCOTTISH OFFICE INDUSTRY DEPARTMENT: THE SALE OF THE SCOTTISH BUS GROUP[75]

ix. Between August 1990 and October 1991, the 10 subsidiary bus companies comprising the Scottish Bus Group were sold, realising £96 million. Management teams bid in all 10 sales and five were successful. Our predecessors were concerned that the decline in the companies' profits in the period prior to the sales affected the value of the businesses and the prices received for them. They noted that the decline occurred while some companies were being run by managers who subsequently bought them. With a view to ensuring more effective management control and to maximising the value of a business prior to sale, they recommended the early appointment of senior managers with no interest in the buy-out and with a clear remit to improve company profitability and sale value during the pre-sale period.

DEPARTMENT OF TRANSPORT (NOW DEPARTMENT OF THE ENVIRONMENT, TRANSPORT AND THE REGIONS): THE FIRST SALES OF TRUST PORTS[76]

x. For each of the sales of these ports in 1992, clawback arrangements were introduced designed to enable the taxpayer to benefit from value not identified at the time of the sales. The clawback applied to gains from disposal of land and buildings in the subsequent 10 years. One of the ports sold to a management buy-out team was resold 18 months later for more than three times the original price. Our predecessors noted that the Department had not considered introducing clawback on the increase in the value of shares, since such interests may result from extra efficiency rather than uncovenanted gains. However, they did urge the Department to consider, for future sales, the case for a clawback where any increase in value can be attributed to a failure or inability on the part of the successful bidder to meet undertakings given at the time of the sale. The Department did not consider it to be practicable in this case but the Government undertook to consider the case for using clawback mechanisms in the particular circumstances of a privatisation.

DEPARTMENT OF TRADE AND INDUSTRY: THE SALE OF THE BRITISH TECHNOLOGY GROUP[77]

xi. In this sale to a management-led consortium in 1992, initial proceeds of £27.75 million were realised. The Department introduced clawback provisions on income arising from the sale of land and buildings in the five years following the sale of the business. They also invited bidders to make proposals for sharing any income from the company's existing portfolio of technologies in excess of the company's corporate plan. A 60 per cent clawback for five years was negotiated with the successful bidders. In applying clawback to income from intellectual property rights, the Department were seeking to obtain a future benefit from the company's main source of income, based on the technologies held in the company's portfolio at the time of sale. Our predecessors welcomed this novel use of clawback to improve the return to the taxpayer.



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