Examination of Witnesses (Questions 220-239)
MR JOHN
SMITH, MR
ETIENNE DE
VILLIERS, MS
ZARIN PATEL
AND MS
CAROLINE THOMSON
18 NOVEMBER 2008
Q220 Paul Farrelly: I do not have
that note in front of me, but I have a discrepancy with the £10-£50
million turnover.
Ms Patel: That is pre acquisition.
One of the things you are required to do in accounting standards
is to show what the performance of the company was before you
acquired it as well as after you acquired it. The figures I have
just given you are for the period before acquisition. For the
period after acquisition, on page 25 of the summary financial
statement you will see what Lonely Planet make afterwards. Their
turnover post acquisition is £20.8 million,[29]
and it made a small loss of £2.1 million which included the
acquisition cost of Lonely Planet.
Q221 Paul Farrelly: It was £10 million
before acquisition and a small—
Mr Smith: The turnover is about
£50 million a year.
Q222 Paul Farrelly: What sort of
yardstick did you use for valuations?
Mr Smith: A large number, as you
would expect, not just about the current profitability either—although
it is fair to say that the core book business is extremely profitable—extremely
profitable. I think it is fair to say that if Tony and Maureen
Wheeler were here today they would be telling you that they are
rather pleased at just how profitable they have made the book
business, but their various investments in the online space have
not been as successful and their online material was making losses.
By the way, not a unique situation: many media companies are having
the same problem with their online business. In our own decision
about it, we were looking at a range of different ways in which
we could make the thing even more profitable for us, not from
the knowledge that the book business itself is highly profitable
already and even there a clear view from us about exactly how
we would develop the book business with a launch of new guides.
Indeed, we have already started launching different guides. In
America, for example, there is a whole new series of guides that
are coming out which we think will become profitable quite quickly.
We are launching in India and China—which are big and growing
tourism markets, where we think we can make more out of the book
business even than was being made before. On the website, we could
see how using our own existing skills in the various websites
we have had for some time could turn around the performance of
the websites from what was a loss at the point we bought it into
a profit.
Q223 Paul Farrelly: What yardstick
for valuations do you use?
Mr Smith: All sorts of different
things. There is a mixture.
Q224 Paul Farrelly: Talk me through
a few things.
Mr Smith: A mixture of net present
value of the future cash flow. As you will know, Mr Farrelly,
everybody has to do that when making any kind of acquisition at
all. To do that, you have to take a view about what the synergies
are going to be. To do that, you have to then disaggregate whether
they are revenue synergies or cost synergies. To do that you have
to take each individual bit of the business and, essentially,
do an entirely new business plan of your own which you believe
you can perform, based on the acquisition when you have got it.
We did all of those things. We ended up with a base case, a low
case, a mid case, and a high case. Frankly, the amount we bid
was lower than our low case. People who suggest that we have overpaid
or that we did not know how we were going to make any money out
of it, it is just not the case. So DCF first of all, and, second,
market—
Q225 Paul Farrelly: Who were your
professional advisers?
Mr Smith: We had a series of ten
different advisers, including Deloitte, who acted as our due diligence
partner right the way through the transaction on commercial, financial,
taxation and so on. Our own project manager was a person who had
spent his whole life trained in due diligence for acquisitions.
Then we asked Lehman Brothers, Investment Bank, to do a validation
of the valuation before we completed the acquisition. They are
just a small number of a large number—
Q226 Paul Farrelly: Who acted, just
out of curiosity, for the other side?
Mr Smith: They had a variety of
different people helping them as well, Mr Farrelly, including
their minority shareholders that they had at the time who were
in the world of private equity.
Q227 Paul Farrelly: I hope you do
not feel me to be nitpicking but I am trying to get a feel for
this.
Mr Smith: That is fine.
Q228 Paul Farrelly: Could you explain
to me, because I would expect this in a public acquisition circular,
the terms of the put option for the last 25%.
Mr Smith: It is not an acquisition
circular, Mr Farrelly.
Q229 Paul Farrelly: No, but I would
expect that information to be shown. What are the terms of the
put option? Can you describe the terms of the put option for the
remaining 25%?
Ms Patel: Would you like me to
read out what we said in the published accounts of the BBC, again
in note 19? "In accordance with financial reporting standard
no. 25, Australian $67.3 million (£29 million) liability
was recognised on the date of acquisition in respect of a put
option of up to 25% of the share capital of Lonely Planet, which
is exercisable by the minority shareholders for a period of up
to 25 months from the acquisition date." It then goes on
to explain the accounting treatment. Perhaps I will not bother
reading that out.
Q230 Paul Farrelly: So it is another
£29 million.
Ms Patel: Yes.
Q231 Paul Farrelly: That is fixed.
Ms Patel: Yes. That is recognised
in the accounts as a liability.
Q232 Paul Farrelly: It is a fixed
cost. That basically seems one hell of a price for a business
that was marginally profitable, with the levels of turnover either
pre or post acquisition that you have just given.
Mr De Villiers: It may be that
I can help here. It was not. Having come from a world of private
equity and having made a number of acquisitions in my Disney life
as well, we went through this with significant due diligence.
The multiples, the DCFs, the terminal values, and all of the various
scenarios that one would build into any acquisition planning,
all fell within the acceptable. We were not anywhere close to
where I felt as a non-executive and the other two non-executives
from outside the company with good commercial experience felt
that we were overpaying for the business. We simply were just
not overpaying.
Q233 Paul Farrelly: In terms of procedure,
finally, on this tack: when you negotiate with your own professional
advisers, what steps do the BBC Board then take to make sure that
they are satisfied that it is fair and reasonable independently?
Ms Patel: That is one of the reasons
why the Group Finance Director is a non-executive Director of
the Worldwide Board. Other than making sure that the terms of
the due diligence were very searching, were independent, and were
assessed clearly, for both myself and my team, which is separate
from Worldwide, but also the Trust team, the key element of evidence
for us was the Lehman's independent fairness opinion letter, where
they had access to all of our financial judgments we were making,
to all of the due diligence. It was that letter that independently
assessed whether we were paying a fair value that was something
that the non-executive Directors on the Worldwide Board but also
the non-executive Directors on the BBC Board itself and the Trust
Unit took account of.
Q234 Paul Farrelly: Do you have plans
for a Lonely Planet TV programme?
Mr Smith: A lot. Indeed, we are
just in the middle of producing a new TV series for National Geographic,
the channel, which is a Lonely Planet branded TV series based
around the travel show, and there is a lot more stuff in the pipeline.
We are 12 months into the acquisition. We are really pleased with
how it is going so far. We have launched a whole series of new
books in different countries. We are breaking into new markets.
It is putting on share in nearly all of the key markets that it
works for. We have just re-launched the website. We are about
to do a magazine. There is a lot more to come.
Q235 Paul Farrelly: Did you appreciate
at the time and can you understand the sense of the discomfort
at the acquisition of a major standalone brand in the business.
Mr Smith: Yes.
Q236 Paul Farrelly: To the extent
that some people may feel that it is the commercial side wagging
the public sector dog. This discomfort is not only shared by people
who "would say that, wouldn't they" who are direct competitors.
Can you understand that?
Mr Smith: Absolutely, Chairman.
I can understand it. In the end, this whole debate boils down
to: Is the role of the company to make money for the licence fee
payer? Of course it is, and £9 per licence at the moment.
Is it okay, therefore, to then charge the company with growing
through means that are not simply to do with just making BBC programmes—not
just that but other things as well—providing they meet the
Four C's? Are the Four C's a brake, a sort of limitation, but
within that the idea is to grow as much as possible—with
all the checks and balances and controls and brand discipline
and so on that you would expect—because it is in the licence
fee payers' interests? Or is the mission of the company to not
do anything that is going to offend competitors? That is quite
a tough thing if you are running the company to try to live with.
It is a "one or the other" sort of thing. We have been
responding over the last four years to the remit of successive
governments to grow the company as fast as possible. Indeed, having
then developed a strategy which is very clear—I am sure
the Committee would agree—and not only clear but approved
by the Trust and then published in the Worldwide Annual Review
the year before last in detail and then summarised again last
year, making clear that part of that strategy will be through
acquisitions, because, as somebody pointed out earlier, all commercial
companies grow by a mixture of organic and acquisitions. Having
then done that and then having had an acquisition that there is
then quite a lot of concern about it. It feels slightly as though
we were told to get on with it, we have got on with it, we have
done it and then people say, "Hang on, I'm not sure that
is what I wanted."
Q237 Chairman: That may well be so.
Can I press you a little more on magazines more generally. In
your report you say, "The business has a long-term strategy
of investing in lifestyle and specialist magazines and aiming
to publish the market leader in each sector." We also had
the Government statement that "Magazines will in future be
focused more on brands and subjects that are connected to BBC
programmes ... " Are those two statements not in conflict?
Mr Smith: I do not think they
are in conflict, Chairman. If you go back to the start of the
company and Radio Times in 1923, there is a good example
of a market leader, Radio Times, which does not carry the
BBC's brand and neither is it completely associated with BBC programmes.
It obviously covers, of course it does—in the editorial
and in most things—the material coming from every one of
the BBC's competitors, otherwise people would not buy the magazine.
That is a good example of it. Wind a lot further forward to a
magazine like TopGear, which is very specifically related,
as you would expect, to the TopGear television programme
which is very popular, that is without any doubt the market leader
in car magazines in the UK—and by the way, it is the market
leader in most countries of the world as well as a magazine—and
is an example where there is a very direct link with a BBC programme
where we are also market leader. There are other examples, like
Good Food or Wildlife or music magazines, which
are not specifically related, and neither do they have to be specifically
related, to an individual BBC programme, but they are broadly
connected to the kind of programming that the BBC does. If you
looked at any one of those magazines—and, by the way, including
Olive magazine—on any one month you could highlight
the connectivity that there is within the magazine to the BBC's
output. It is not pound for pound. The magazine is not a printout
of what goes out on screen; it is broadly appealing to the interests
of people who like food, who like wildlife, who like music, and
so on, but it is broadly connected to a BBC programme as well.
There is no difference there, by the way, to what we find with
Lonely Planet. It is exactly the same.
Q238 Chairman: It sounds to me as
if you can use that justification to publish any magazine on any
subject you like.
Mr Smith: Chairman, if I have
given that impression, forgive me. I certainly did not intend
to. To counter it and to give an exact example, four years ago,
when some of these concerns were being discussed, there was a
magazine which Worldwide published called Eve and there
was a series of cross-stitching magazines which were then fuelling
quite a lot of fire from people, saying, "What the hell has
that to do with the BBC?" At the time there was no connectivity
between those magazines and the BBC's airwaves. There were not
really any cross-stitching programmes on BBC television, and,
similarly, there were not any general women's interest programmes
on BBC Television at the time which would have made Eve
justified. At that point, part of the review that occurred
in the run-up to the Charter led to Eve and the cross-stitching
magazines being sold because there was not that kind of connectivity.
So there has to be that connectivity but it does not have to be
directly a programme to a magazine.
Q239 Chairman: Let me try another
one, Girl Talk, which is aimed at young teenaged girls.
This month's edition is a High School Musical 3 special. That
may be connected with Etienne's previous employer, but it has
nothing to do with his present one. Why does that fit in with
the BBC's programming?
Mr Smith: I need to record being
very impressed with your knowledge of our magazine portfolio,
Chairman.
29 Note by witness: This should be £23.1million
(split between Publishing of £20.8million and Digital of
£2.3million). Back
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