2BHS under Sir Philip Green
8.Sir Philip Green bought BHS in May 2000 for £200 million. He sold it to Taveta Investments (No. 2) Limited (Taveta 2), another Green family company, in July 2009 for £200 million.8 Taveta 2 sold BHS in March 2015 for £1. We looked at the performance of BHS to better understand the reasons for its decline and its prospects for recovery. In particular, we examined the extent to which the Green family looked after its own financial interests and those of the business.
9.There was an increase in profits in the early years of the Green family’s tenure and dividends were only paid in these years. But the total dividends paid by BHS Ltd were £414 million in the 2002–04 period, almost double the after-tax profits of £208 million. BHS Group, the parent company, paid dividends of £423 million in this period.9 These would have included the value of dividends paid by BHS Ltd, as well as additional items such as the sale-and-leaseback deal with Carmen discussed in this chapter and the amortised negative goodwill (the value of assets above the original purchase price).10 We were told that the Green family received £307 million of this.11This effectively removed value from the company, precluding its use for purposes such as investment or pension contributions.12 Whilst BHS was not alone in this period in paying dividends in excess of profits, the scale of the payments were proportionately far higher as a percentage of net profits than key competitors.13
10.The BHS dividends were not the only example of the Green family paying itself dividends far in excess of company profits. In 2005, the parent company of Sir Philip’s Arcadia group of companies, Taveta Investments Ltd (“Taveta”), paid a record dividend of £1.3 billion, described as “the biggest pay cheque in British corporate history.14 A major corporate restructuring was required to make the dividend possible. The payment was effectively funded by taking out loans of around £1 billion, significantly reducing the covenant of the Group.15
11.In evidence, Sir Philip did not consider BHS paying dividends so far in excess of profits improper or unwarranted. In his view, the company was profitable and the dividends were conservative.16 Fellow shareholder at the time, Robin Saunders, also thought that the dividends were justified.17 Sir Philip argued, reasonably enough, that the dividends should be seen in the context of the company’s profitability at the time they were paid, rather than the later dwindling profits and the subsequent loss-making period after 2009.18 It was his choice to consider the prevailing retail environment at that time and decide whether to invest or extract cash.
12.The high level of dividends paid in the early years of Sir Philip’s ownership, followed by several years of losses, meant that BHS was left in a far weaker position by 2014 than it had been when it was bought in 2000.19 By 2014, BHS was left on life-support, having drawn on all its accumulated reserves and more as a result of large dividends and heavy losses. It was effectively propped up by debt to other Green family companies totalling around £250 million—debt that Sir Philip was largely forced to write off when he sold the company.
Table 1: BHS balance sheet: 2001 and 2014
|
£ million |
||
|
|
2001 |
2014 |
|
Total assets |
501.0 |
295.3 |
|
Total liabilities |
-205.4 |
-551.6 |
|
Net assets: |
295.6 |
-256.3 |
|
of which: |
|
|
|
Share capital |
66.7 |
66.7 |
|
Accumulated reserves |
228.8 |
-323.0 |
Source: BHS Company Accounts
13.The improvement in BHS’s profitability in the early years of Sir Philip’s tenure is indisputable. However, this appears to have been achieved primarily through cost-cutting measures and squeezing suppliers. Crucially, BHS’s turnover remained flat through much of Sir Philip’s tenure and declined in the latter years (see Figure 1, below). Sir Philip initially cut costs but he did not grow the business.
Figure 1: BHS Turnover and Profit 2000–201420
14.In his evidence to us, Sir Philip rejected the idea that the dividend payments had been at the expense of subsequent investment. He said that £600 million was invested in BHS in the years after the dividends were paid.21 Regardless of this, it is clear that during Green’s ownership, BHS’s tangible fixed assets diminished in value—from £430 million in 2000 to £183 million in 2014;22 i.e. Sir Philip did not invest enough to maintain the value of the company.
Figure 2: BHS Gross and Net Investment 2000–201423
15.Another way in which Sir Philip was able to boost BHS’s profitability in the short-term, while ultimately increasing payments to other Green family companies, was through the sale of property. In 2001, BHS Group sold a number of BHS stores to Carmen Properties Ltd (Carmen) as part of a sale-and-leaseback arrangement. Ten stores were sold to Carmen—a Jersey-registered company owned ultimately by Lady Green24—for £106 million. BHS Ltd then paid rent to Carmen for the use of these properties. They were ultimately sold back to BHS as part of the sale to RAL for only £70m (with the proceeds of the sale going to Lady Green as the sole beneficial owner) but, over the lifetime of the sale-and-leaseback arrangement, rent of £153million was paid by BHS to Carmen.25 The arrangement would have acted to reduce profits earned in the UK on which tax was payable. It would also have had tax benefits for the Green family, given that Carmen Properties was registered in Jersey.26
16.Sir Philip Green’s family accrued incredible wealth during the early, profitable years of BHS ownership. Over the duration of their tenure, significantly more money left the company than was invested in it. There is no evidence of improved turnover, market share, or major increase in investment that might be expected from a leading retailer. Investment was evidently either inadequate in scale or ineffective in improving the competitive edge of the business. This sustained poor retail performance forms the backdrop to Sir Philip’s efforts to sell the business.
8 Taveta Investments (No. 2) Limited, Annual accounts to 29 August 2009. Taveta 2 took out a 10-year £200 million loan at an 8 per cent interest rate to fund the purchase. That loan was provided by three companies owned by Lady Green and registered offshore. (Letter from Lady Green, 4 July 2016)This transaction is set out in further detail in paragraph 118 of this report.
13 BHS Ltd, Primark, and M&S Company Accounts; BHS paid dividends of 172 per cent, 110 per cent and 305 per cent of net profits attributable in 2002, 2003 and 2004. In the same three years, Primark paid dividends of 69 per cent, 55 per cent and 71 per cent; Marks & Spencer paid dividends of 156 per cent, 52 per cent and 47 per cent.
14 ‘Philip Green pays himself record £1.2bn,’ The Guardian, 21 October 2005
15 Taveta had purchased Arcadia in 2002 for £850 million (or £866.4 million, including fees and expenses). In 2004, Taveta Investments No.2 Ltd (“Taveta 2”) was established and took ownership of Arcadia in return for shares to the value £2.3 billion, effectively revaluing the company and making that increase in share valuation available for dividend payments. It was confirmed to us that Taveta 2 was established for this purpose. It appears that this dividend was ultimately funded through loans: the value of loans on the Taveta balance sheet increases by £1 billion and its shareholder equity is reduced by the same amount. Effectively, Taveta 2’s shareholders realised £1.3 billion of the assumed revaluation of Arcadia, funded through raising loans.
17 Qs 917 & 946 (Robin Saunders)
19 As a private company, BHS’s accounts were much less forthcoming than they had been when it had been a publicly listed company, with little commentary given in the accounts after 2001 on performance, cost drivers or the nature of any investment which took place. The position is further complicated by the changing ownership structures of BHS and related companies, inter-company transactions and the lack of any published accounts since the sale to RAL.
20 BHS Company Accounts. NB the peak in 2009 turnover coincided with a longer than usual accounting year, following the integration of BHS into the wider Taveta corporate group.
22 Analysis of BHS Accounts Tangible Fixed Assets Notes 2000–2014
25 BHS Group Accounts Related Party Note 2002–2008; BHS Ltd Accounts Related Party Note 2009–2014
26 BHS would have recorded the rent it paid as an expense that could have been offset against tax. While Carmen Properties would have paid tax on rental income as a non-resident landlord, Lady Green would not have paid tax on any profits taken from Carmen, given that it is a Jersey-based company.
© Parliamentary copyright 2015
22 July 2016