Examination of Witnesses (Questions 800
- 819)
WEDNESDAY 10 FEBRUARY 2010
MR MALCOLM
SMITH
Q800 Lynne Jones:
By whom?
Mr Smith: As I have said already,
and I am repeating myself, our adviser strongly supported it against
myself and my FD's recommendation to drop the price when they
sold Country Life. We felt we were totally within our rights to
do that; in fact we were. That was silly, not doing that was stupid
actually. Then not dropping the price after First Milk dropped
out was I think also a missed opportunity. I certainly did strongly
put my case forward at an acquisition committee meeting and I
remember it vividly now. I said, "Why are we bidding this
price when there is no opposition?"
Q801 David Lepper:
Had you been a board member, would you have been in a stronger
position?
Mr Smith: I doubt it, to be honest,
because you are just one among others. Ultimately, in a board
meeting, as you know, you very rarely take an open vote, in my
experience of 20 years on boards, because the chairman never allows
an open vote in a board meeting in any kind of business, never
mind a co-op or anything else.
Q802 Chairman:
You had these reservations. You felt they were well founded, particularly
in the light of the removal from the equation of Country Life.
You said that the finance director and yourself had made a recommendation.
Who was that to?
Mr Smith: To the acquisition committee.
All the board members were there. We said we felt it was particularly
unreasonable and, in fact, ridiculous to continue to pay the same
price.
Q803 Chairman:
When you went to the acquisition committee, did you produce some
kind of documentary analysis so that the board could have sat
down, looked at a presentation and said, "Okay, here we are"?
Against that background, would the other members of the acquisition
committee, the people who were on the board, have had a chance
of turning to Mr Moody, saying, "Look, Mr Smith says this.
You say that" and have a debate about rationalising the two
positions?
Mr Smith: Moody rubbished it.
We heard about this in a meeting. It did not quite happen in a
clinical manner. We were in an acquisition group meeting. Philip
Moody came back and gave us the latest words from on high about
his last meeting with Guy. He dropped in, "Oh, by the way,
they have sold Country Life". Immediately Mark, quite rightly,
because he is not thick, said, "Hang on. That means we have
lost earnings, therefore the price ought to be significantly reduced".
Those were his words: "significantly reduced" by millions.
Immediately Moody said it was not an agreed EBITDA (Earnings before
interest, tax, depreciation and amortisation) and therefore they
can sell it and it does not affect the volume of business and
carried the board. Absolutely astonishing.
Q804 Chairman:
His reaction, the one you have just described, just took everybody
else along?
Mr Smith: Yes. On the board there
were, I think, six farmers at that point who were not stupid at
all, but they were not versed in this kind of fairly esoteric
analysis of the evaluation of companies. If you said to them,
"What is the average EBITDA multiple for the purchase of
a business like this?" they would not have really known because
that was not what they did. In fairness, they were a wee bit bamboozled.
I still to this day do not actually understand because Philip
is a very bright guy. He has many faults but he is bright. I do
not understand now even why he was not prepared to do it because
he understood exactly what we were talking about.
Q805 Chairman:
Understanding the point you make about financial ratios and measures
which may not be the lingua franca of farmers, most farmers can
understand that if you take something out of a business it is
going to be worth less. That is a very straightforward concept.
Are we saying that, when the farmer directors who were on the
acquisition committee were confronted with this relatively straightforward
piece of information that a part of the business that had previously
added value had gone, nobody said, "Perhaps that does affect
the price"?
Mr Smith: There were one or two
dissenting voices. Michael Oakes was always a dissenting voice
and he saw it pretty quickly. I think we had got into a wee bit
of deal mania by that time. I was astonished. Of all the things
that happened, I thought that was the most worrying.
Q806 Chairman:
If you had had, hypothetically speaking, a genuinely independent
adviser—in other words, you were not in a Philip Moody situation—somebody
who you brought along to give a watching brief, it might well
have been that said person could have said, "Just a minute.
If you want my judgment, this alters the name of the game",
but there was not, if you like, a whistle blower on the deal.
Mr Smith: I entirely agree. That
is a very astute point. Typically, when you are making purchases
you will employ somebody of an independent nature. I have worked
in the venture capital world for the last three years and it is
black and white. For example, we have used Ernst & Young.
Ernst & Young were our auditors at Dairy Farmers of Britain.
We used Ernst & Young when I was in the venture capital world
until recently. The advisers there would never let anybody get
away with that. They would be like a rat down a drain. They would
say, "Look, you cannot possibly pay the same price. They
have taken a brand out and sold it. Come on. Get real". That
did not happen.
Q807 Chairman:
What do you think Dairy Farmers would have looked like if it had
not bought ACC? In other words, the acquisition of it was compliant
with the objectives of the business to buy more customers, processing
capacity, distribution system. If you had come to a conclusion
and said, "This ain't the deal for us", what would have
happened to ACC? Can you help us to understand that?
Mr Smith: I think ACC was in severe
difficulties. The Co-op had more to do with ACC, more to the point.
They were playing a very clever sales game. They did a very good
job with the negotiations, there is no doubt about that. They
knew we needed to do something and they knew the farmers were
minded to do something. I think they used that very cleverly against
us, which is fair play from their side of the table. What would
you do in their situation? You would do the same. As to what they
would have done, they may well have carried on for a wee while.
Who knows? It is difficult to say.
Q808 Chairman:
Forgive me if I have not made myself clear. I was trying to understand
whether Dairy Farmers could have carried on.
Mr Smith: I misunderstood. I think
the Co-op's point of view was more interesting than the Dairy
Farmers', but that is another side of the coin. If you take the
Dairy Farmers' point of view, I said to the board that there was
only one alternative to us if we did not buy ACC. That was to
join with First Milk, come what may. I did not see a third way.
We had a low average milk production against competing co-ops.
Milk Link had done a reasonable job under quite a good CEO, in
my opinion, and a good chairman. They had done a good job and
continue to do so in getting into milk processing and I think
they were extremely well advised and did well. I felt First Milk
were in a bit of a state and they still are actually. That is
no disrespect to the chairman who is doing a great job, in my
opinion. Some of his farmer directors are truly trying hard to
make the best of a bad job, but you do not need to be a genius
to see that First Milk has one or two strategic issues facing
it at the moment. Combined, the two companies could have done
great things. Paradoxically, the CEO of First Milk at the time
had also been brought in, an ex-Mars employee. Peter Humphreys,
I think his name was, who has just recently left the company.
He had no particular interest in joining the two companies together,
I dare say. For my part, I got on extremely well with John Duncan,
the CEO. I think he was minded to try and work together to join
the two companies at the hip. We did an awful lot of work on anti-competitive
stuff to find out if that was possible. That was a definite nixed
opportunity for us. There was only one thing. There could only
been one chairman and one CEO and they would not have needed an
adviser.
Q809 Chairman:
That rather underscores again the argument that you put to us
at the outset, which is part of the reason we are where we are
is the personal agenda and the protection of the positions of
others on the board.
Mr Smith: I think you might say
that I am pushing that point overly. That is my opinion. I think
that most people on boards have an agenda of their own, in my
experience, having worked on boards a long time. What you tend
to find normally is that the robust nature of the board dynamic
prevents them getting control. That did not happen in DFB. Nobody
was stopping it happen. You cannot blame somebody for getting
his hand in the till when he can. Somebody is going to get his
hand in the till unless you stop him. I have worked in private
business all my life and in business people will dip their hand
in the till unless there are systems to stop them doing it. Even
MPs have done that in the past, sadly, but, moving on from that
point, it is true in the world, is it not?
Q810 Lynne Jones:
I gather that the Members' Council was given a presentation on
the purchase, in favour of the purchase, after which there was
overwhelming support. Who gave that presentation?
Mr Smith: I was involved heavily
in that presentation in terms of what I saw as the operational
advantage of being involved in the liquid milk business. I genuinely
felt I could turn it round. I have a history of turning businesses
round. We presented to the council. It was at Stoke. We always
used to present at the Britannia Stadium. I remember the day vividly.
The farmers had some reservations about ACC. It would be unfair
to say they were totally behind it, although only one person voted
against it. We had a long presentation; we discussed it with them
and they saw perhaps it was one of our only two opportunities.
They all knew what the other one was, which was joining First
Milk, because they had worked it out for themselves.
Q811 Lynne Jones:
Was there any discussion about the price that was to be paid?
Mr Smith: Not a lot, to be honest.
Q812 Lynne Jones:
Why did you not express your reservations that you had at the
presentation?
Mr Smith: At that point in time,
the die was cast. I was on the acquisition group. It is a bit
like Cabinet responsibility. You have done the deal. What is the
point in rubbishing it to the poor guys who are going to pay for
it? I still felt we could make it happen. I felt personally we
had overpaid, but I felt that that was not the major issue. I
felt we could have made it happen even having overpaid. I felt
it was inappropriate at that point in time to go through that
dirty washing because it would not have helped the farmers and,
more importantly, I still felt we could make the deal work.
Q813 Lynne Jones:
Would that have been different if you had been a member of the
board?
Mr Smith: That is a very good
question because as you know probably from previous knowledge
you have gained the board met privately with the council. The
interesting thing was the council chairman—the last one
was Steve Yates; before him was a different character altogether—the
previous one and I used to have regular meetings for dinner once
a month, because I asked to do that. I did not know that the board
was actually giving the truth, the whole truth and nothing but
the truth. I arranged to see him and meet him for dinner, sometimes
at his house, sometimes at a hotel or wherever. The chairman stopped
those meetings between six and nine months before I was sacked.
Q814 Lynne Jones:
Was there a presentation about how the deal stacked up financially?
Mr Smith: You are missing something.
What I have just said is very significant.
Q815 Chairman:
I did not ask the question because I thought Lynne would ask it.
Why?
Mr Smith: I was hoping she would.
Chairman: Go on. Tell us the story then.
Q816 Lynne Jones:
I wanted to finish asking the question.
Mr Smith: My apologies.
Q817 Chairman:
Answer the question as to why and then we can go back to your
answers.
Mr Smith: The answer to the question
why, in my opinion, is because I was telling it like it was and
giving an opposing point of view. The chairman did not like that.
He wanted only his point of view to be accepted by the chairman
of the committee because the chairman of the committee had the
potential to stop things happening that the board was recommending.
Q818 Lynne Jones:
Could I have an answer to my question then in terms of what finances
were presented?
Mr Smith: We gave them a presentation
of the cash flow that we thought was going to come out of it.
We told them it was going to be hard work and I told them upfront
it was going to cost them for a couple of years at least. The
penny a litre they were not going to get back on the selling price
initially.
Q819 Lynne Jones:
Did you feel that you had told the truth in terms of your presentation?
Mr Smith: I am not a liar.
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