Examination of Witnesses (Questions 600
- 619)
WEDNESDAY 6 JANUARY 2010
MR ANDREW
COOKSEY, MR
ROB KNIGHT
AND MR
PHILIP MOODY
Q600 Chairman:
You mean by that, due diligence?
Mr Moody: No, it is really prior
to due diligence. It is really the evaluation process; trying
to understand the extent to which the business would be able to
add value; the extent to which one would be able to see a long-term
strategic future for it. Due diligence is very much a question
of ascertaining whether or not the information that you have been
presented with is factually correct and accurate. That is the
way I would differentiate between the two. Therefore, that transaction
was not pursued, but it did lead to an opportunity to look at
a separate transaction of similar assets from a different vendor.
Those discussions were considered in detail, at length, and were
considered to be of strategic interest. As a result, serious discussions
were entered into with the vendor, which very nearly resulted
in an agreement surrounding an offer for those businesses, but
ultimately did not, and those discussions terminated. By that
time, ACC was being offered as an acquisition opportunity.
Q601 Chairman:
Just before we get to ACC, can you give us an order of magnitude,
particularly of the second option, which sounded an "almost
right" sort of solution. What kind of money would have been
involved in investing in the second option?
Mr Moody: Very similar. The price
we were looking at was in the order of about £50 million
to £60 million.
Q602 Chairman:
£50 million to £60 million, so you did not quite make
it with that one, and we move on then to ACC.
Mr Moody: Correct. First of all,
it is helpful to understand the criteria that the board had set
in trying to pursue the vertical integration strategy which, remember,
its members had charged it with pursuing. There was very much
a view that the company needed to become a broad-based dairy company,
with the scale and power to be able to return a sustainable value
to the members in the future. That was the basis around which
strategic acquisitions were considered. To understand what a broad-based
dairy company means, if you looked at the UK dairy industry as
a whole at that time, around 50% of milk produced in the UK was
being delivered to liquid assets, around 25% was being delivered
to cheese producing assets and the balance of 25% was going into
the remainder of the different types of sectors of the industry—condensed
milk, powder, butter, et cetera. Therefore, if we were going to
seek to be a broad-based dairy company once we had pursued that
first stage of acquisition, we needed to make sure that either
we acquired a business that had that broad base or if we were
looking at assets that were only in one sector that we had sufficient
investment capability left to be able to invest in other parts
of the sector so as to end up with a broad-based dairy company.
In the case of ACC, ACC very closely fitted that profile. It consumed
about a billion litres of milk a year and about 600 million litres
went through its liquid factories, with the other 400 million
going through its other factories—cheese, et cetera. Therefore,
it was felt that certainly in the context of having a balance
across the various sectors of the dairy industry was in, it had
that balance. It had a number of other features about it that
made it attractive to Dairy Farmers of Britain. It also clearly
had some aspects of it that made it less attractive to Dairy Farmers
of Britain. It was recognised as being a processor through relatively
small regional dairies rather than large super dairies, but it
was also recognised that it had a distribution network that enabled
it to service sectors of the industry that some of its better
capitalised and more resourced competitors were not directly operating
within and did not always have the distribution structure to enable
it to enter into parts of the market. To help understand that
observation, ACC did sell into the multiple retailer sector but
predominantly through the co-operative retail trading group, whereas
many of its bigger and more resourced competitors were very much
stronger players in the multiple sector and focused very much
on the multiple sector. ACC was a significant seller of product
to what many describe as the convenience sector, the smaller regional
stores and the smaller national chains, and very much more profitable
parts of the sectors, margins were higher in that sector generally.
It also owned a doorstep delivery business. There are two other
companies that own doorstep delivery, but in the area where it
owned doorstep delivery, it was a significant player and consequently
derived a level of profitability from that business, albeit that
it was as a national industry in doorstep delivery in decline,
it was still very profitable. It was felt that there was a degree
of balance across sectors, that it offered the opportunity for
the business to develop its positioning within those sectors,
rather than go up head-to-head in competition with its better
funded and better capitalised and better resourced competitors
in some areas.
Q603 Chairman:
You are now convinced that you have got an opportunity that ticks
a lot of the boxes that you wanted to tick in pursuing your strategy;
you get your group of bankers to come along, Rabobank heading
the corporate advisers, and you start looking in some detail at
ACC as a business because, obviously, you have had to decide if
you were going to pursue it, how much you could afford to pay
for it. How do you decide what it was right to pay for it?
Mr Moody: In answering that question,
let me first explain the process that ACC was offered for sale
within. Co-operative Wholesale Society (CWS) had decided to conduct
effectively a sealed bid auction process.
Q604 Chairman:
Because they had got out of all of this, they had decided it was
not their business?
Mr Moody: Whatever their strategic
reasoning to invest and they had decided to sell. They had decided
to go through a very formal process of inviting competitive tenders
from interested parties for its business. CWS had a well-resourced
mergers and acquisitions team, headed up by an experience M&A
individual, and they also took on board financial advisers in
the form of HSBC Investment Bank, who were acting for CWS at the
time. They issued an information memorandum, which contained information
about the business and we were invited to submit an indicative
bid, by a deadline, setting out various aspects of our level of
interest, along with any other interested parties. So, all interested
parties were given until this date to submit their bid. In putting
together DFB's bid, DFB organised itself in terms of a corporate
governance process, a managed process, and it also engaged a team
of professional advisers to enable it to evaluate the opportunity,
and it also engaged in a club of bankers to work with DFB to help
provide the finance to enable the acquisition.
Q605 Chairman:
Who were the advisers?
Mr Moody: The financial advisers
were Rabobank; the legal advisers were DLA—a very substantial
UK law firm; the project managers were Smith & Williamson;
the legal project managers were BrookStreet des Roches; and there
were then other firms that we used in the due diligence process.
Q606 Chairman:
Who was in the club of bankers?
Mr Moody: The club of bankers
at that time comprised four banks: Rabobank itself, HSBC, Barclays
and RBS. The intention was that each of those four banks would
lend £25 million, presenting a funding capability of £100
million, part of which was bridging future member contributions.
The board formed what was called an acquisition steering group,
which was a sub-committee of the board. It was chaired by Mr Knight,
I was a member of it, and that acquisition steering group met
weekly, sometimes twice weekly. It was attended by advisers and
it was on the basis of reviewing the detailed information provided
by CWS, the advice from advisers that it chose to make its recommendation
to the board. The board then considered the recommendation of
the Acquisitions Steering Group (ASG). It also received the advice
from Rabobank and upon that decision, the board made its decision
on how much to bid in the indicative bid. So, that was the process.
In terms of the information available to the ASG and to the board
and to the company's advisers, the information obviously comprised
that contained in the information memorandum produced by HSBC
IB, acting for CWS, and Rabobank, as advisers to DFB, provided
some benchmarking information to enable DFB to form a judgment
as to what level it should bid for this company. That benchmarking
information contained their estimation of what they thought the
business was worth as a stand-alone static business; what they
thought that business was worth to potential acquirers who might
be rival bidders for the business.
Q607 Chairman:
Who did the benchmarking?
Mr Moody: Rabobank. They provided
the detailed paper to ASG and they talked it through in detail
with ASG. So, this benchmarking exercise sought to guesstimate
the value of the business to our potential rivals for that business.
Bear in mind the rivals were existing processors in the liquids
sector, in the main, and therefore were they to have acquired
ACC, they would immediately have had rationalisation and synergy
benefits available to them to enable them to reduce costs within
the business. So, it is not surprising that the advice from Rabobank
was that ACC would deliver greater value to one of them than it
would to DFB, which did not have any such synergies to bring to
the table. They also considered what value DFB could derive from
ACC, were it to acquire it. That gave a bid range. They also evaluated
what the maximum price, in their opinion, our competitors could
bid for ACC if it wanted to do so without diluting their own earnings.
That gave a ceiling, that was not to suggest that was the price
that the competitors would bid because, clearly, they would want
to derive value for their own shareholders.
Q608 Chairman:
Could you put some numbers on this for us?
Mr Moody: I would suggest that
is commercially sensitive information, Chairman. I would be more
than happy to provide you with that information in writing provided
I could be allowed to do so on a private basis. You will appreciate
that we have legally-binding confidentiality undertakings in place
with parties. I am also concerned that some of the companies I
am talking about are publicly-listed companies and I would not
wish to provide information that could be regarded in any way
as price sensitive to those companies.[3]
Q609 Chairman:
The Committee would be grateful to have that information, on the
basis that you have described, simply because it would help us
to relate the generation of advice to what is supposedly the published
figure as to what you actually paid at the end of the process.
Mr Moody: Yes, I am happy to provide
that information, in writing, if I can have the Committee's assurance
that it will be received as private and confidential information.
Q610 Chairman:
It will.
Mr Moody: Fine, I will do that
after this hearing.
Q611 Chairman:
Rabobank gave you some information and advice. You look at all
of this and you make an indicative bid for the business. What
happens then?
Mr Moody: We submitted the indicative
bid and CWS subsequently sought to clarify with us aspects of
that bid—as I am sure they would have done with other bidders—and
they then produced a short list of people that they wanted to
invite to proceed to the next stage. The next stage was effectively
to provide a final bid with any specific conditions attached to
that bid that the bidder would seek to impose. In order to move
from indicative bid to final bid, further information was released
by CWS, giving a greater insight into the business and an opportunity
to meet the management of ACC in very controlled conditions was
presented to potential bidders. On the basis of our ability to
meet the management, question them on our ability to receive further
information, that enabled DFB and its advisory team to vary or
confirm some of the assumptions that it had made at the indicative
bid stage.
Q612 Chairman:
You go through that process, you are getting a better insight
into the ACC business and we come to the point where you have
to make your mind up. You know that there are one or more interested
parties other than yourself in the business. How much did you
know about the others who were bidding for this?
Mr Moody: We were never advised
who the other bidders were, so it was summation on our part as
to who they might be, but there are a relatively small number
of players in this sector and so it was not difficult to guess
who they might be. At the point that the final bid was issued—and
I should state that it was not just the decision of the board
of Dairy Farmers of Britain because we also had to have the support
of the banks in this process. Throughout this whole process of
indicative and final bid stage, there were substantial teams within
each of the banks reviewing exactly the same information that
Dairy Farmers of Britain's board was reviewing and considering
whether or not the view that the DFB board was coming to, was
supportable or not.
Q613 Chairman:
When you got to the final figure as to what you described, did
all the banks agree that the figure you offered was a correct
figure?
Mr Moody: Yes, they supported
the offer.
Q614 Chairman:
Could you, therefore, explain why I read in your board minutes
that Rabobank indicated that you had paid too much for the business?
Mr Moody: We have to be careful
which bit of Rabobank we are talking about. There was the bank,
Rabobank, and the advisory Rabobank team. In terms of the banking
club, it is perhaps helpful to explain that during the process
of pursuing the acquisition of ACC, not all of the four members
of the banking club decided that they wanted ultimately to lend
into the transaction, for different reasons. RBS was the first
bank to withdraw from the club.
Q615 Chairman:
Why?
Mr Moody: I do not actually recall
why. I am quite happy to look back on my files to see whether
I have a note, and advise.
Q616 Chairman:
Perhaps Mr Knight might assist?
Mr Knight: I do not recall either.
Q617 Chairman:
We would like to know.
Mr Moody: I will do my best to
advise you of that, but certainly my recollection is that the
transaction team working within RBS were in support of it but
it failed to get credit approval. As I say, that is a recollection,
that may not be accurate and I will seek to clarify that and advise
the Committee subsequently.[4]
Q618 Chairman:
RBS are out. What happens next?
Mr Moody: We have to go to the
other three banks.
Q619 Chairman:
We have got Barclays, HSBC and Rabobank?
Mr Moody: And we have to say to
them, instead of being four banks at £25 million, will you
now be three banks at £33 million? After considerable consideration,
going back to their respective credit committees, they came back
and said that they would support at £33 million each. So,
our financing was still in place and we could continue to process
our final offer.
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