Dairy Farmers of Britain - Environment, Food and Rural Affairs Committee Contents


Examination of Witnesses (Questions 400 - 419)

WEDNESDAY 28 OCTOBER 2009

MR MICHAEL OAKES

  Q400  Chairman: Did you anticipate getting a £4 million tax bill as a result of this purchase?

  Mr Oakes: No, we did not.

  Q401  Chairman: Does that say something about the quality of the due diligence?

  Mr Oakes: That was something which happened because the Co-op had moved things around within different parts of the Co-operative Society. They had moved property around from different parts in order for them to be able to sell the business.

  Q402  Chairman: Is that not what due diligence is about: exploring every nook and cranny to make certain you know what you are buying?

  Mr Oakes: At the end of the day, we did not pay the £4 million tax bill. We had to pay some money for people's time in order to put a case as to why we should not pay it. It was the Co-op's responsibility, not ours. We did spend time working with the Co-op to argue with HMRC about who was liable for that. Under due diligence everybody that bid for it had to take it that what was said was true. There were guarantees and warranties. Later on we did go back to the Co-operative Society to say, "Actually, X factory was not quite what you said it was. X contract was not quite what you said it was. There were not as many of X, Y and Z as you said." There were potentially at one point talks going on around a claim somewhere in the region of £12 million to £18 million for things that we believed were not what they said on the tin.

  Q403  Chairman: Were those ultimately settled to your advantage?

  Mr Oakes: Unfortunately not. We did get a price increase at one point from the Co-operative Society. It was at a time when the market was moving up so we believed we were due for a price rise. I think there was a sweetener there at one point to try and put us back in our box. Ultimately, what it came down to was: did we really want to take our biggest customer—because they were our biggest customer at the time—to court over what was a substantial amount of money but, in the bigger picture, was it worth pursuing them for that and losing our biggest customer? At the end of the day, when we renewed the contract the second time—and it does hint at it in the receivers' report—all those issues were put to bed. If was a bit of, "If you forget those, you can have this." That is my cynical view. That was the reality of the due diligence indications.

  Q404  Chairman: In hard reality, what you bought perhaps came as a little bit of a disappointment compared with the optimistic tone of the due diligence and the optimism of the board in buying the asset, because you were going to acquire a customer base. The hard reality was there was quite a lot of hidden cost in there which you did not see.

  Mr Oakes: There were some parts of the business which were definitely not what we believed they were. There were some contracts that came with the business which were not what we thought they were.

  Q405  Chairman: When you started DFB, why did you think you could be successful, bearing in mind the intense competition in the dairy sector? You are up against massive competition like Arla, the very aggressive business proposition of Wiseman. You come along as the smallest of the remaining co-ops. Why did you think you were going to be successful against that kind of background?

  Mr Oakes: At the time, as I said earlier, most producers were getting paid less than the cost of production no matter who they supplied. There was a groundswell coming out of the Curry Report and farmers needed to add value and reconnect with the consumer. We believed in shortening the supply chain and taking some of the processes. We all know processing is not as simple as perhaps some people think it is and there are quite a lot of costs there.

  Q406  Chairman: That is an aspiration. The question I was asking was far more focused on the business end of it. To achieve that aspiration—we have just had a discussion about a major investment that you made—you were without the necessary processing and customer base in the first instance. That is a fairly fundamental thing that you had to do. Against the fact that you are in this highly competitive, capital hungry world of dairy processing, ruthless as we have exposed in terms of our questioning about price, what made you think from a hard-nosed business point of view that you were going to be successful?

  Mr Oakes: We brought in the best people we could find to help us do it. The board set the strategy but we went out there and found the best executive team that we perceived we could find and alongside us as farmers on the board we also brought in retail experience on the board and processing experience on the board. We tried to bring in the best people we could in order to give us the best chance. It was never risk free. There was always a risk.

  Q407  Chairman: The best led you into demise a relatively short time later.

  Mr Oakes: Ultimately DFB ended up where it did. That is for all to see. The industry changed a lot on the way. The dedicated supply chains which you have heard about from Tesco—Asda still have them; Arla still have them—all the major retailers except the Co-op now have a dedicated supply chain. That is on the back of the activity that the major co-ops have invested in processing in a slightly different way. We went down the liquid route. They tended to go down the commodity or more of the cheese route. I perhaps personally underestimated the fierce competition in that liquid market place. The ACC business came with doorstep business as well. Whilst it is declining, it was potentially quite profitable. Doorstep demand is declining year on year but it is still a reasonably profitable business. You were not taking on the other major processors head to head. It was not really until we started to deal with Tesco and started to really stand on some of our competitors' toes that they started to fight back. I am not saying they did anything wrong because they certainly did not. Business is business and they were not going to take it lying down.

  Q408  David Taylor: You did spend about £100 million on ACC Lincoln and Bridgend dairies expecting that the investment would be repaid by member retentions and trading efficiency but in the four years that followed not only did that £100 million not get paid; it was not even half paid. Are those agencies, who gave you the best possible advice to which you refer still around in agriculture, giving that best possible advice?

  Mr Oakes: Some are. Some are not. Some have disappeared. Some of the people that we used as advisers are no longer around. Some are.

  Q409  David Taylor: We will move on to the governance of DFB. I do not know whether you were necessarily present when Lord Grantchester, who is here in the public gallery today, told us quite clearly that he did not feel that the governance structure of DFB was to blame for the problems experienced by the business. The structure that you have, representative democracy, is that you have farmer members, of which you are one; elected members from their district under the members' council, of which you are one; and the members' council then electing people to serve on the board of directors, of which you are one. You are well placed to have had a close opportunity over a seven-year period to pass comment on the governance structure. I know this may be a retrospective analysis but do you agree there were weaknesses and, if so, what were the most significant ones?

  Mr Oakes: The board set the strategy and the executive went off and did the work. As a whole, that is no different than any PLC. The difference is, for me as a farmer on the board, because the business is owned by the suppliers in effect, we did get involved as farmers on the board with the members facing issues. It was the board with the executive that interacted with the council. There was a slightly different role than there would be in a PLC because your suppliers are your owners in effect and you are on the board representing them, or they perceive you are there to represent them. I do not think that is a weakness. That is quite a strength because you are there with the executive. In here I am a dairy farmer and I want my farm to succeed as well as my neighbour's farm. If you look at who was left at the end of DFB, it was the farmers who were still there, trying to put it right. There is some strength in that. We invested a lot of money in training the council. They worked with the Plunkett and the FFP to help them understand any advice on accounting and other governance structures. We also had a scholarship programme where we were training young, keen council members who were working with Plunkett and the FFP again to look at the best co-ops and PLCs throughout Europe mostly so that there would be young, keen people to come and kick me off the board. We wanted young, keen people. Initially, we had to pick the board from the council we had. Two of us, of which I was one—David Wilkinson was the other—did not have any non-exec experience when we first got on to the board. We have since both gained quite a lot in various places but that potentially on day one was a slight weakness. We made that up by making sure we were surrounded by other people with plenty of experience.

  Q410  David Taylor: What weaknesses do you think, on reflection, the governance structure had?

  Mr Oakes: I think it was very difficult in the last six or eight months. You wanted to tell the membership as much as you can about where the business was. It is their business. You feel they have a right to know but there is confidential information and there is commercial information there. Getting that balance right is quite difficult. Members felt they should have known we had the problems we had but if you are a PLC you would issue a statement, then get on and put it right. You would have members on the phone every night almost asking you what the issues were. That is not a weakness. It could be a strength but it is a difficulty.

  Q411  David Taylor: You felt compromised by the position that you were in really?

  Mr Oakes: It was not an easy position to be in.

  Q412  David Taylor: Did you get much personal stick from the members' council or members of it?

  Mr Oakes: The whole board was very accessible. The council could access the board very easily.

  Q413  David Taylor: How much of your time typically, prior to the final collapse period, was involved with board activities?

  Mr Oakes: Probably a week a month when the business was in a steady state. In the last eight or nine months it was considerably more.

  Q414  David Taylor: You said quite clearly that the board made out the strategy and you expected the executive to go and deliver it. What was the trajectory, if you like, of the relationship between the board and the executive team? At some point it must have been a tense relationship perhaps?

  Mr Oakes: It was a challenging relationship. We got rid of one chief executive relatively soon after we had taken over ACC. We did change other senior executives. The board changed as well because we were challenging ourselves. They were having to report to us and we expected them to deliver. If they did not, they would have to account for why not.

  Q415  David Taylor: Were you one of the few who were on the board throughout its life?

  Mr Oakes: No. The four of us who were there at the end were there at the beginning.

  Q416  David Taylor: Four out of?

  Mr Oakes: There were six farmer directors at one point and four non-execs who were not farmers.

  Q417  Chairman: You were talking about communication. If my memory serves me correctly, I think one of the reasons why the Co-op got nervous about you as a supplier was a comment in the press. They were reading about some of the difficulties that you were gradually encountering. I understand that the dairy industry is the victim of quite a lot of personal news letters, the blogosphere and all the rest of it. Did you ever monitor what people were saying about your business?

  Mr Oakes: We were using Pinsent Mason to advise the board over the last eight or nine months, just to make sure that we were always in the right place as a board, making sure we were looking after all the stakeholders in effect. An interesting comment was from one of their senior partners. He had been involved in lots of businesses in a similar position to ours and had never seen a business with so much noise around it and so much activity.

  Q418  Chairman: I am not an expert on these things but I gather that there are a number of privately posted internet news letters which, if you like, put information out. If it is not factually based, sometimes people add their own version of it. With that growing noise and the fact that ultimately it contributed to the demise of your business with the Co-op, did that not tell you something about the degree of communication that you were having within your business and that it seemed to be being substituted by other people who might have been making it up as they went along?

  Mr Oakes: It was very difficult. You either got on and tried to put the business right for the membership or you could have spent seven days a week trying to address what the commentators were saying. There were fora; there were websites. There was a whole host of things which would have been a full time job for somebody to address. You would probably have never won the battle.

  Q419  Chairman: You did not feel the need to deal with that with more direct communication with the membership?

  Mr Oakes: We did but as PwC were imposed on us by the bank and as the board were put in handcuffs in effect, to a certain degree, the bank were very nervous about what we said to the membership. If we had said anything which would have caused them to lose money, they made it quite clear what the consequences personally for us would be. You are trying to manage a customer base. You are trying to manage suppliers who are also your owners and the membership. At the same time the credit insurers pick up the news and one of them decides he is getting nervous and moves. That hits the press. It just builds and builds but ultimately you are still in a position where you are trying to find a way through it.


 
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