Examination of witnesses (Questions 60
- 79)
WEDNESDAY 3 MAY 2000
BARONESS SYMONS
OF VERNHAM
DEAN, SIR
JOHN CHISHOLM
and MR TERENCE
JAGGER
60. I do not know. What advice have you taken
from investment bankers, lawyers, accountants?
(Baroness Symons of Vernham Dean) Sir John has been
consulting Rothschild's and we have also had Warburg's and of
course we have had the Treasury giving us the benefit of their
views too. I think we are going to get much more advice available
to us during this period when we have got some plans and when
we will be able to examine the possibilities of how we go to the
market about the sorts of money that we may expect to see raised.
I make no bones about it. I am extremely reluctant to start saying
it could be X or Y or Z because I do not think that is going to
be in the interests of the British taxpayer when we come to the
flotation.
61. Who are the lead advisers? Who advised you
on the structure you put forward in consultative terms?
(Mr Jagger) Warburg, Dillon Reed and PricewaterhouseCooper
jointly.
62. Were they the same people who advised on
the previous reliance proposal?
(Mr Jagger) They have been advising the MoD throughout
the process.
63. They advised on the previous formula and
this as well?
(Mr Jagger) That is right.
64. What advice have they given you about the
special structure which the PLC will have, the range we have here,
the retention of a special share, the approval of shareholders,
contractual conditions, prohibition of benefactors and so on?
What advice have they given you about what limitations this will
place on the stock reaching value?
(Mr Jagger) I do not want, for the reasons the Minister
has indicated, to go too closely into guestimates or figures here.
Clearly the more constraints you put on an organisation there
will be an effect on investors' perceptions and the value in the
Stock Exchange. We do not believe that the constraints we are
proposing to put on this organisation will materially affect the
value. There is an enormous amount of value still in DERA and
we believe measures are essential to protect the MoD's interest
and we hope to strike a balance.
65. The record on golden shares is that they
are established initially and then fade away fairly quickly. Do
you envisage that would happen in this instance?
(Mr Jagger) We have not developed the wording of the
golden share in detail but there is no reason why the golden share
should not have as long a life as we need to protect essential
defence interests.
66. What legislation will you require to carry
through your plans?
(Baroness Symons of Vernham Dean) The legal advice
is that we do not require primary legislation to carry through
what we are proposing here.
Chairman
67. It will be secondary.
(Baroness Symons of Vernham Dean) There may be a need
for secondary legislation, as I understand it, but in the past
privatisations that have been undertaken have needed primary legislation
because of unpicking and winding up existing statutory arrangements
governing the activities in question. I understand from my legal
advisers that this does not arise in the case of the PPP for DERA.
Mr Viggers
68. Can you talk us through the line of reasoning
that led you to think that the right course was to produce a plc
and then later to float it on the Stock Exchange rather than to
issue shares at an earlier stage? Can you just talk us through
that?
(Baroness Symons of Vernham Dean) As I understand
it that is the advice we have had over maximising value. If your
implication is that it might raise more money to sell straight
to a private sector buyer then there have been a number of different
strands of advice we have had over this. The advice which we found
most persuasive was that we should go for the plc and then flotation.
We will want the New DERA obviously to have a track record to
take to the market and we were advised that this was important
and that, therefore, it was essential that the separation takes
place. This is quite an ambitious timetable, I make no bones about
it, looking to 2001, that we should have the separation of New
DERA and Retained DERA, that thereafter move to the plc and then
when that has established something of a track record that we
should then move to the flotation. Terence, you have been talking
more about this and I think, Sir John, you wanted to add on this
because obviously Sir John has got a good deal of commercial experience
as well.
(Mr Jagger) If I understand you correctly, the core
of the question is whether there should be a gap between the creation
of the plc and the flotation. Is that right?
69. Yes.
(Mr Jagger) Obviously you could have either a very
long gap or you could theoretically do it almost instantaneously,
simultaneously. I think the benefit of creating the plc is to
put in place the structures and procedures, for example financial
systems, etc., that are required in a plc and to demonstrate that
they are working for the benefit of investors. How long that gap
is is a very judgmental matter, I do not think there is a black
and white answer to that.
70. The name of the umbrella is the Compliance
Committee, compliance that obviously New DERA will need that other
companies do not have. I can understand that it will be difficult
at this point to work out what effect that will have on the price
of flotation but what you must know is the value of the capital
assets that will be transferred to New DERA?
(Sir John Chisholm) The question, as I understand
it, is we ought to know the value of the capital assets transferred
out of the trading fund into the plc.
71. Yes.
(Sir John Chisholm) The answer is yes.
72. What are those?
(Sir John Chisholm) Do we know them precisely right
now? The net value of DERA as she stands at the moment is about
£600 million. At this moment we do not have the detailed
break down of the organisation split into the two parts, but roughly
speaking they will be one-quarter, three-quarters that we see
in the Core Competence proposal.
73. So about £450 million of capital assets
will be transferred to New DERA?
(Sir John Chisholm) Roughly. This is a rough figure,
unaudited at this moment.
(Baroness Symons of Vernham Dean) So it has a health
warning.
(Sir John Chisholm) To guide your thinking it would
be sensible to think in those terms.
74. You have gone sufficiently far in paragraph
25 of your consultative document to say "It is possible that,
as an interim measure, strategic financial investors would be
introduced to assist in this process." It does not really
say very much but it must have come some way along the track for
you to put it in the consultative document. Can you elaborate
on that?
(Mr Jagger) The work we are engaged on over the rest
of the year, assuming once the effect of the consultation is taken
into account, is to separate the two organisations into the New
DERA and Retained DERA. We will then need to take a view as to
the potential for flotation, whether we can indeed float it immediately
and what the sensible timetable for that is. It may be when we
get to that point that on the advice of our financial advisers
we say "yes, this is fine, this company is ready for flotation,
it has got a sufficient track record, a good technology case,
we can go to the market in 2001". It may be that our advisers
then say we need an interim period in which strategic financial
investors may be able to assist us. I do not think that we can
be ready to make that judgment at the moment. It is difficult
to say at the moment but later in the year.
75. Will you restrict ownership of shares to
UK residents or any particular class of investor? Will you have
maximum percentages of shares to be held by any collaborating
parties?
(Baroness Symons of Vernham Dean) That is another
point that needs to be bottomed out. It is obvious that some of
the argument has been that there should be restrictions over foreign
ownership and there should be restrictions on individual shareholdings
as well and defence manufacturing. I do not know if you have been
able to discuss that further with our financial advisers, Terence?
(Mr Jagger) I do not think I can add to what you have
said, those are exactly the issues.
Chairman
76. Let me get this clear. Is it feasible that
flogged off DERA could be owned by Nomura or any American company,
a defence manufacturer, Alchemy, anybody, BMW? I am not xenophobic
but I would like some assurances that you have given thought to
who might end up purchasing.
(Baroness Symons of Vernham Dean) We do give you assurance
that we have thought about it and we do give you assurance that
we have flagged it up in our own thinking in the document that
there are very, very sensitive issues around foreign ownership,
around individual huge shareholdings and around defence manufacturers
having very substantial holdings. Those are all very sensitive
issues and, if I may say, I think we very much welcome your views
and the views of others about the limit to those sorts of shareholdings.
This has not just been swept on one side and has not been a matter
of interest, it is a matter of interest but we have not reached
a conclusion.
77. I do not wish to appear to be xenophobic—
(Baroness Symons of Vernham Dean) No, it is perfectly
reasonable.
78. It is difficult enough to swallow this privatisation
anyway but if it was remotely possible that a German company,
a French company, a Japanese company, an Iraqi company, although
I presume you would rule that out—Are European rules inhibiting
you from putting a national standard down for floating on the
Stock Exchange?
(Baroness Symons of Vernham Dean) I have not received
advice that they do but I am sure that we will get more advice
as we proceed during this period. I do think we have recognised
the alarm bells, if I can put it that way, that you have obviously
got ringing in your head, Chairman. That is something we have
to be very careful about.
79. It would remove some of our anxieties if
this thing does proceed that you have given it a great deal of
thought, that you have looked at European law as to whether you
can put any restrictions. I have heard one or two instances of
companies who might express an interest and neither of them derive
wholly or substantially from the United Kingdom, so that is a
major concern. Before you make the final decision I hope that
you will satisfy this Committee and others as to the restraints
upon ownership.
(Baroness Symons of Vernham Dean) Thank you for that
advice.
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