Examination of Witnesses (Questions 580
- 599)
WEDNESDAY 6 JANUARY 2010
MR ANDREW
COOKSEY, MR
ROB KNIGHT
AND MR
PHILIP MOODY
Q580 Chairman:
Would you refresh my memory, when was it that you left?
Mr Moody: It was 30 October 2008.
Q581 Chairman:
30 October 2008. What was the end of the financial year?
Mr Moody: 31 March.
Q582 Chairman:
31 March, because in 2008, the accounts had a clear going concern
statement in them, did they not?
Mr Moody: Yes, they did.
Q583 Chairman:
It was a pretty rapid deterioration of the company's position,
was it not?
Mr Moody: It was triggered by
a specific single event, which was that the bankers to the company
issued the company with a formal notice of default, stating that
in the bank's opinion, the company had created an event of default
capable of enabling the bank to summarily withdraw its facilities.
It was that notice from the bank to the company that triggered
my resignation.
Q584 Chairman:
Let us move into the issue that appears to us as mere observers
the heart of the matter, namely the events that led up to the
purchase of ACC. If we go back for a moment and try and draw some
of the strands of the information you have been kind enough to
give us, you have given us the impression that you have formed
out of two small co-ops a larger business where farmers felt that
they would have a greater opportunity to determine their own future
financial well-being, where many had taken a long-term view of
the prospects of the new co-operative—DFB—where they
were prepared by various means of the £20,000 they could
subscribe and the loans that they gave to the business to help
capitalise it and they set off in hope and anticipation that the
brokerage business would move forward in a way that you described.
Implicit in that is that somehow you would acquire the shape and
format of a European co-operative model where there was an element
of vertical integration. I assume that model is the thing that
informed the strategy of the board in the run-up to the purchase
of ACC. Is that correct?
Mr Moody: That is correct, yes.
Q585 Chairman:
One of the things, Mr Moody, that I am intrigued with is that
you recognised the stresses and strains of trying to raise very
considerable sums of capital for future investment against a basis
where inevitably the owners of the company—the farmers—were
constrained as to how much money they could put in formally, and
also how much they could afford, because, as you rightly pointed
out, you said the co-op came into existence at a time of weakness
in terms of the price for, particularly, liquid milk in the market
place. Mr Cooksey, you referred to what you described as "in-fill
investments", which, if I have understand that, is the purchase
of smaller processing and dairy production outwith of the bigger
picture of the ACC purchase. Is that correct?
Mr Cooksey: They were as a consequence
of the ACC purchase. There had been some smaller investments made
into soft cheese manufacturing and other matters.
Q586 Chairman:
Before we get to the story about how you decided to buy ACC, Mr
Moody, I am interested to know whether you were involved in doing
any calculations. Did you make any recommendations to the board
as to bluntly just how much money the co-op could effectively
afford to invest in the strategy that the board had agreed? Did
you say to them, "Look, guys, this is the limit. This is
how much we can afford to put forward on an investment strategy
to achieve the board's objectives"?
Mr Moody: The capital requirements
necessary to pursue the strategy were regularly the subject of
debate within the board room. Indeed, post the acquisition of
ACC, there was a separate sub-committee of the board.
Q587 Chairman:
I am going to stop you, Mr Moody, because I am not interested
at this moment in my question as to what happened post the acquisition.
I am interested in the following: you are sitting there, you have
got a plan, you are going to pursue it but, as with any business,
you have a rough idea as to how much money you can afford to spend
on the plan, right? Before you set off, it is like going out to
buy a car, all of us have aspirations, but then we are tempered
by the reality of "What can I afford?" and "How
much is it going to cost to run?". You come down to the practicalities.
My dream of owning some vast exotic sports car might well be rapidly
tempered by the fact that I cannot afford it; I have got to have
something more modest; and so I make my personal choice as to
what kind of a car I might like to have. Was there a thought process
like that? I can imagine around the board table the excitement
of the opportunity of going into vertical integration must inevitably
have been tempered by someone saying, "Look, guys, this is
the kind of rough limit as to what we can afford". Did that
kind of discussion take place?
Mr Moody: Yes, it did.
Q588 Chairman:
What was its conclusion?
Mr Moody: Its conclusion was that
the combination of funds capable of being invested by members,
together with realistic levels of borrowings, which the company
could take on board, was sufficient to enable it to take a step
to a point where it could achieve a reasonable scale of processing
vertical integration.
Q589 Chairman:
Can I ask you rather more specifically, that is a lovely description
in words of what the policy was that you had already decided to
do. I would assume that is what you were going to do. I am interested
in the back-of-the-envelope number. How much did you think you
could afford to invest in pursuit of the objectives you have described?
Mr Moody: In broad terms, it was
always recognised that the company could probably enable itself
to invest something between £100 million and £150 million
into that level of strategy, but that would depend entirely, of
course, on what it used that money to acquire, the level of profits
of the business it had acquired and the ability of those profits
to support it. What we also recognised at the time was that if
we invested that amount of money into a processing business, that
would then give us a business that had in itself two assets. The
first asset was the financial return that business would provide
and the second asset was the strategic value that it represented
to the wider dairy industry. It was widely recognised by the board
of DFB that there was overcapacity in dairy industry processing
in the UK.
Q590 Chairman:
That is true, but you were not a philanthropic institution, you
were not going out to rationalise the dairy industry, you made
it very clear from the beginning that it was the interest of the
farmer members that was uppermost in your minds, not sorting out
the problems of the capacity in the dairy industry.
Mr Moody: I am not suggesting
that. What I am suggesting is that the fact that there was over
capacity in the industry presented the opportunity to people owning
assets to combine them with assets owned by others to the mutual
benefit of the people who owned those assets. In other words,
there would be the opportunity to derive synergistic benefits
by combining them with other assets that would enable additional
value to be released, and that was where the strategy had a second
leg to it.
Q591 Chairman:
You quoted a figure of £100 million to £150 million.
Was that over a period of time, or how much it could blow on the
right one-off purchase?
Mr Moody: I think your use of
the word "blow" implies a somewhat cavalier attitude,
which was never present within the board, or the way in which
the board operated.
Q592 Chairman:
What word would you use?
Mr Moody: I would use "invest".
Q593 Chairman:
All right, let us chose a word that you are comfortable with.
I will ask my question again. You had a potential to invest between
£100 million and £150 million; was that over the pursuit
of the strategy over a period of time, or as a one-off investment
to achieve the strategy?
Mr Moody: It was our view that
was the maximum we could reasonably invest within the foreseeable
future. Obviously, the foreseeable future probably would have
meant something like a five to 10-year timescale.
Q594 Chairman:
A five to 10-year timescale. You could argue that if you spent
£15 million a year over 10 years, that would be one way of
achieving it, or a different formulation of it. One comes to the
question of what was the comfortable level of investment that
you could afford. That £100 million to £150 million
that you were indicating, was that adding up the sum total of
monies that farmers had invested—the £20,000 touch—and
then the loans which they made available, plus what you could
sensibly borrow from the banks? Is that how it was comprised?
Mr Moody: Yes, indeed, we would
never have envisaged raising all of that money from the members;
it would have been impractical to have done so.
Q595 Chairman:
Now, earlier on, when we were just establishing your own credentials—
By the way, have you found the figure yet?
Mr Moody: Yes, I have.
Q596 Chairman:
Would you like to put that figure on for the record? We do not
want to neglect that. Even though Mr Cox is not here, his question
lives on in the record.
Mr Moody: The total fees paid
to my firm in the year ended 31 March 2004 was £381,650.
The total fees paid to my firm in the year ended 31 March 2005
was £902,148; in the year to March 2006, £678,962; in
the year to March 2007, £688,188; and in the year to March
2008, £423,466. I do not have information relating to the
period since that, but I would be more than happy to supply it
to the Committee if you would like me to.[2]
Q597 Chairman:
Thank you. We will consider that offer and thank you for making
it. Let us come back to the run-up to the purchase of ACC. Earlier
on, if I have understood you correctly, you said that the process
to advise and inform how you were going to translate the strategy
into reality was informed by external advice from your bankers.
I think you said that Rabobank was the lead bank, is that correct?
Mr Moody: I never said that. I
said that Rabobank were the financial advisers on the ACC.
Q598 Chairman:
What I wrote down was, "Rabobank lead the corporate advisers
on ACC".
Mr Moody: Exactly, but that is
different from a lead bank.
Q599 Chairman:
Let us just park that for a second. You decided on the strategy;
try and give us a thumbnail sketch as to how was it that you decided
that ACC was the way forward. Were there any other options that
were looked at before you got to the ACC decision-making process?
Mr Moody: Yes, there were. At
the time that I joined the board in December 2003, the company
was already in discussion with relation to the acquisition of
a different set of processing assets from one of the major dairy
processors. I joined that set of discussions to see whether or
not it was an appropriate set of assets for the company to acquire.
There was some degree of attractiveness in those assets but Dairy
Farmers of Britain had entered the process late, it was not realistically
able within the time frame being set by the vendor of those assets
to be able to put forward a credible bid, or for Dairy Farmers
of Britain to have carried out the level of rigour necessary to
satisfy itself that they would have been an appropriate acquisition.
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