Examination of Witnesses (Questions 820
- 839)
WEDNESDAY 10 FEBRUARY 2010
MR MALCOLM
SMITH
Q820 Lynne Jones:
Did you omit certain things?
Mr Smith: I am not a liar by omission.
Q821 Lynne Jones:
You still gave a presentation which gave them the impression or
you felt at the time that the purchase at that price was something
that was reasonable at the end of the day?
Mr Smith: They wanted us to get
into liquid. We got into liquid. I told them at the time we paid
a lot of money for it, but that was the only way we could get
it. It transpires that maybe it was not the case but I did not
know that exactly at the time. I found out more later.
Q822 Lynne Jones:
Why do you say it was the only way? Earlier on you were talking
about the Co-op and the fact that the implication was that there
was some discussion with the Co-op about paying a lower price.
You implied that the price for the deal of having the loan was
that in effect you paid more.
Mr Smith: No. That is not the
case at all. You are mixing everything up there. The reality is
I told the acquisition committee I thought they were paying too
much. That information was not conveyed to the Co-op by Philip
Moody at all, ever, and the Co-op extracted the additional loan
because we could not get that money from the HSBC.
Q823 Lynne Jones:
I think in the discussion it was implied that you only got that
loan because you paid more than it was worth.
Mr Smith: In retrospect, I suspect
that is the case.
Q824 Lynne Jones:
The way you gave evidence implied there was some discussion over
that point.
Mr Smith: No. That is not the
way I gave evidence. I did not imply it.
Q825 Lynne Jones:
You said at the start of your evidence session that you were sacked,
and you just repeated it, although on your CV I think you write
that to the surprise of the industry Dairy UK was born and unified
the dairy sector for the first time since deregulation in 1994.
"My work being done, the board agreed a generous exit."
That is a somewhat different gloss on the situation than being
sacked.
Mr Smith: I got a lot of people
writing to me in the industry at the time, including the Wiseman
brothers, asking what was going on. Also, I got a nice letter
from Sir Ben Gill, who I had worked with at Westbury, and various
people were ringing asking what was going on. I did not think
it was very appropriate for me to rubbish Dairy Farmers of Britain,
which had been my employer, and the chairman and the board to
the industry at the time. I think it is appropriate now because
you have asked me a direct question. I did not know at the time,
when I originally wrote that, that of course Dairy Farmers of
Britain was going to go down the tubes.
Q826 Lynne Jones:
You also say in your CV that DFB posted record profits in 2003-04
and a turnover of £550 million and you also say with an employee
base of approximately 3,000. That must have been before the acquisition.
Mr Smith: No. We employed about
400 people before we bought ACC.
Q827 Lynne Jones:
That was 2003-04. You talk about an employee base of approximately
3,000. That must have been the period before the purchase of ACC.
Mr Smith: I would have to look
at the numbers again. We had Lubborn. We had Nene Valley Foods.
We had a lot of drivers. I would need to look at that.
Q828 Lynne Jones:
That is not actually accurate.
Mr Smith: In your opinion it is
not. I will have to check that.
Q829 Chairman:
She is only reading out what is written down here.
Mr Smith: Her opinion is not accurate.
I am saying I do not know. I will have to check the exact numbers.
Q830 Lynne Jones:
You also earlier on implied that Mr Knight was somewhat overpaid
for the work that he did. I presume both the chairman's and the
CEO's salaries were on public record?
Mr Smith: Yes.
Q831 Lynne Jones:
You also referred to a generous payout that you received. I am
not necessarily asking for the exact figures, but in terms of
the orders of magnitude what was the proportion of the chief executive's
salary that the chairman was receiving and what was the proportion
of that, in multiples perhaps, that you received in your generous
exit?
Mr Smith: It is a matter of public
record. It is in my contract. I got a year's pay. I say "generous";
it was what I was due really. It was not an issue which caused
any atmosphere.
Q832 Lynne Jones:
As a proportion of your salary, what was the chairman paid?
Mr Smith: The chairman was earning
at least as much as me by the time I left.
Q833 Lynne Jones:
Mr Moody?
Mr Smith: An awful lot more than
that.
Q834 Lynne Jones:
He was earning more than the chairman?
Mr Smith: I would think so.
Q835 Lynne Jones:
I think we had the figures from him.
Mr Smith: He got five million
I think over a five year period. Not him personally, I have to
say, but his company. However, he was the lead partner and he
would have had a rather nice bonus out of that.
Q836 Mr Williams:
In evidence he said he had a salary, he was a particular type
of partner and his remuneration was not dependent on either the
income or profit of the business.
Mr Smith: It was unique in my
experience but I have no reason to doubt his written word.
Q837 Chairman:
Just help me to understand what happened after you had acquired
ACC. You had these assets of various efficiencies and vintages.
What did you then do with ACC?
Mr Smith: That is an altogether
more interesting question and I think it is very germane. I have
a policy of visiting every company that I run, even when I had
an international business. I visit them all to get a feel for
it. With Llandyrnog immediately I just knew there was a major
problem and that frankly we were being misled at the DD. I believe
to this day we were misled at the DD. Proving it is one heck of
a thing to do. We did try to prove it. Once again, fair play to
the chairman, he did do his best to try and get reparation on
that, but we did not get very far. You tend not to. We decided
to shut it and we got on with it. I employed a guy called Gerry
Smith, who was a very experienced operator, who did a great job
in a difficult circumstance. I wanted to close Whitby, but I was
prevented from closing Whitby by the chairman who felt that the
farmers would revolt if we closed that too soon. I said, "What
is the point in not closing it? I will go to the farmers. I will
explain why we are doing it. I will take the rap". He still
would not do it, so there was an element of not biting the bullet
going on here, which I have to say was a bit disappointing. Frankly,
I could see his point but he was wrong. Economically and in every
other sense he was wrong, but he would not let us get and do it.
I was keen for taking the knife out because I did not see an alternative.
It is not because I like sacking people. I had no choice. The
farmers' money was just disappearing down the drain and, frankly,
Whitby was a hopeless asset anyway. There was a wee bit of vacillation
about making tough decisions, and that is a fact. I think the
board was at fault in allowing that to carry on. I think they
should have actually just taken our advice and done it because
that is what it is all about. That is what I do for a living.
I had previously turned round two other assets which were losing
wadges of money by taking some difficult decisions and I felt
there were political considerations starting to come into play
which had no part to play in making hard business decisions. I
was disappointed in that.
Q838 Chairman:
You really left the business before the radical plans. I think
we heard that towards the end there was Project 523 which had
begun. Supposedly, profitability had returned to the business
but at the end of the day the customer base had disappeared. You
did not really advance the rationalisation agenda very much for
ACC.
Mr Smith: I was not really allowed
to get on with that in the way that I thought was appropriate.
I brought in a really good guy in Gerry. He did a pretty good
job in difficult circumstances subsequent to my departure. He
was a very experienced operator. They brought a guy called Andrew
Cooksey in, a nice young lad but not fit for the role he was given.
They interviewed Gerry for it and they interviewed Andrew for
it. Andrew was given a job way beyond his competence, I mean way
beyond his competence. I could speculate on the reasons for that
but it would be really rather pointless.
Q839 Chairman:
One of the things which I probed about a little bit earlier, but
perhaps we could just revisit so that we really understand it,
is this question of the bidding for the Co-op's business. In terms
of the diversification strategy, you had had very good support,
it seems to us, from Tesco. With their local milk initiative,
they strike me as having gone out of their way to try and be helpful.
When things went wrong they accepted some difficulties in then
developing what they wanted to do, but they still stuck by you
as a supplier. On the other hand, the ruthlessness of the bidding
process for the contract for the Co-op's business obviously was
the undoing of ACC. It still bothers me that, for better or worse,
there were a lot of people who knew something about the dairy
industry who would have realised that when it came for that contract
to be renewed you would have been up against people like Wiseman,
who had an awful lot of capacity to fill. Seemingly, their reputation
is one of getting business to fill up their factories because
obviously it makes sense so to do. There is a strong probability
that they are going to bid you down to the last whatever. Perhaps
you did not have the necessary assets and efficiencies to rival
the Wiseman's of this world. Did that kind of analysis go on when,
if you were like, you were saying, "We have ACC but its wellbeing
is going to be dependent on keeping the customer base alive"?
The only way to do that was to be as efficient as the best in
the industry because, by definition, if you were not you were
going to lose out in a contract bidding war.
Mr Smith: As I said previously,
you are absolutely right. Your analysis is spot on. We were never
going to win that one. That was why I said, "Look, there
is only one thing to do here. We have to take the next step and
consolidate with another co-op." The DFB board was known
as the £1 million board in the industry because of what was
being taken out of it by one means or another by the board. One
of the reasons for my final departure was I strongly objected
to the chairman's budget. I said, "Look, at a time of stringent
operations when you are asking us to take the costs down on everything,
I notice the board budget has gone up". He told me to get
lost; it was none of my business.
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