Select Committee on Public Accounts Minutes of Evidence



APPENDIX 1

PRIVATISATION OF THE ROLLING STOCK LEASING COMPANIES (PAC 97-98/352)

Supplementary Memorandum from Mr Andrew Jukes of Forward Trust Rail Limited

Q 157  What income do I receive from my gain?

  The annual after tax income for me personally is approx. £400,000 (it varies with 6-month LIBOR).

Q 200  What was the value placed on secondary lease income?

  In arriving at the final (29th September 1995) bid of £650m, a range of factors and views were allowed for which make it difficult to break down the total with precision. However, as an indication of the contribution of secondary lease income, the forecast net cash flow from secondary leases had been valued, on a discounted cash flow basis, at between £50m and £100m.

Q 213  Please explain the reduction from indicative offer of £845m to the final price of £580m?

  The indicative offer of £845m did not allow for a number of major risks. As set out in the attached extract from the indicative offer letter dated 6 July 1995, these major risks were expected to result in a reduction of approximately £85m.

  Following the final bid on 29 September 1995, Hambros requested a reconciliation between the final bid and the indicative bid, and a copy of this is also attached. This shows the effect of the two main changes bidders were requested to make in the assumptions used. The revised assumed completion date (1/4/95 for indicative and 31/10/95 for final) and the altered assumption on cash in the business were each worth £93m.

  The overall reconciliation is as follows:

 £m
Indicative bid845
Allowance for major risks(85)
Cash at 31/3/95(93)
Cashflow from 1/4/95 to 31/10/95(93)
Price increase76
29th September 1995 bid650
Networker Express(50)
Adjustment for limited warranties(20)
Final price580

Indicative Offer

The value of Newco's indicative offer for the shares and the BRB Debenture of Eversholt is £845 million.

The consideration would be payable in cash on completion or such later time as the vendor may require.

Basis of and assumptions underlying indicative offer

  Newco's indicative offer is subject to the conditions and pre-conditions set out below and is made on the basis and assumptions set out in section 4(a) to (h) on pages 19 and 20 of the Information Memorandum. In particular, it is assumed that:-

  • Eversholt is acquired and financed by Newco from 1st April 1995
  • the £93.3 million due from BRB at 31st March 1995 will be settled in cash, as shown in the working capital projections in the Supplementary Information Memorandum
  • the amount of the BRB Debenture including any accrued interest at completion is £601.6 million.
  As we are working with the management team of Eversholt, we have had access to information not available to other potential acquirers at this stage. This has given us an insight into a number of risk areas of which other potential purchasers are unlikely to be aware at this stage.

  The major risks we have identified are:-

  • the possibility that secondary lease rates will be below the levels set out in the Information Memorandum
  • a level of bad debts which is not assumed in the Information Memorandum
  • the possible modifications to, or scrapping of, the Mark I coaches and multiple units
  • incremental costs resulting from recommendations in the Cowden and Clapham accident reports and other major changes to the safety regime.
  • costs associated with the financing of Sparesco.
  No account, beneficial or otherwise, has been taken of the impact of the Networker Express lease arrangements which may be entered into by Eversholt prior to completion.

  To enable you to evaluate all offers on an equal basis we have, as you suggested, not reflected these risks in this indicative offer although they have been factored into our funding requirements shown later in this letter. Our funding structure assumes a price of £760 million, reflecting a reduction of approximately £85 million in respect of the factors referred to above.

Offer price reconciliation

Indicative offer:£760m
Final offer (pre Networker):£650m

  The indicative offer was based on:

  •   Hambros information memorandum
  •   Newco assuming the cash in the business at 1.4.95
  •   Newco assuming the cashflows of Eversholt from 1.4.95
  The indicative offer of £760m was an after reduction of £85m to reflect the information that was available to us but not other bidders at the time of the offer.

The final offer has been arrived at as follows:
 £m
Indicative offer760
Less: cash at 31.3.95(93)
Cashflow from 1.4.95 to 31.10.95(93)
Price increase76
 650

Forward Trust Rail Limited

17 June 1998


 
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