Examination of Witnesses (Questions 60
MONDAY 12 FEBRUARY 2001
SCHOLAR, KCB AND
60. I am always aware that when deals of this
nature come up the one partner who is in a hurry always gives
lots of good reasons why things need to be done yesterday and
most of them do not turn out to be very accurate. What really
concerned me about this was that you did not appearand
I am not one of those who would criticise the DTI for lack of
commercial savvy, because I do think you operate regularlyto
think that having advisers, especially with all of the ambiguities
I have mentioned, working for you earlier would have been appropriate
in these circumstances?
(Sir Michael Scholar) Yes, I am bound to say that
I should have preferred to have had the kind of advisers then
that we have now. In an ideal world we would have had the set
of advisers we now have in place and we would have had longer
to appraise the deal. I am not sure if we had had longer that
we should actually have been able to do much to reduce the degree
of risk to which we were exposed.
61. Would you accept the criticism that the
fact that you did not have advisers reflects perhaps too cosy
a relationship between your Department and the Post Office? Are
you too close? Did you accept what the Post Office was doing when
perhaps you should have had a more critical attitude in general?
(Sir Michael Scholar) I do not think that is fair.
We did take on an adviser. We took on an adviser quickly. The
adviser asked a series of probing questions. He caused the Post
Office to make some changes to the case they had put forward.
We ourselves appraised that advice from our adviser and our own
team, although it lacked corporate finance experience, had a good
deal of commercial experience, a good deal of experience of dealing
with big project finance; they were not babes in the wood.
62. Can you tell me any circumstances in which
you would have vetoed this deal?
(Sir Michael Scholar) Yes.
63. Clearly the Post Office might not have wished
to go ahead with it, if they had not thought the terms were advantageous
but are there any circumstances where they came forward with what
they considered to be advantageous terms where you would have
(Sir Michael Scholar) Yes, I think so. We envisaged
a price envelope which we derived from our understanding of the
likely stream of revenues and costs ahead, discounted by quite
a tough discount rateeight to nine per cent discount rate.
If the deal had gone above that, we would have thought very hard
about whether it should go ahead. If our investigation of some
of these risks had come to a different conclusion and if the remedies
which were discovered and applied in the shape of warranties,
deferred payments, guarantees and so on, we might have thought
again about the deal.
64. In terms of disclosure do you accept that
taxpayers deserve the same level of disclosure, reassurance, assurance,
whatever you want to call it, as City investors? Effectively what
happened in this deal was that the taxpayer was not given what
would be considered to be absolutely essential for any investor.
(Sir Michael Scholar) The shareholder was given the
information, the shareholder being the DTI. There was no problem
about disclosure to the shareholder. The Post Office held nothing
back from us. We were able to find out anything we wanted to.
We, as the representative of the taxpayer, as the shareholder,
had the information. I take your point that the market and Parliament
did not have the information and I entirely accept the view that
you should have it.
65. That is effectively our role on behalf of
Parliament, to scrutinise this.
(Sir Michael Scholar) Yes, and I accept that.
66. You would expect us to take a close interest
in that particular aspect of the issue.
(Sir Michael Scholar) Yes.
67. You were asked earlier about continued monitoring
of this situation. I am intrigued by the fact that there are 24
franchisees, but I suspect that could be a difficult and delicate
relationship as they are in Germany and presumably the commercial
culture is slightly different. Were there any ongoing difficulties
which may have arisen with such a multiplicity of franchisees
or was the relationship a smooth one?
(Mr Roberts) The use of franchisees in the private
sector parcels industry is actually very common, both in the UK
and in Germany. To answer your specific question, no, we have
not had any difficulties. The reason we have not is that it was
a very important part of the deal that we took on and retained
the senior management of German Parcel. We have done that, in
particular the Managing Director and his top team, with one exception
over the two years, are still with us and will remain so under
contract. That has meant we have been able to run with a joint
board, a board which I chair with some representatives from the
UK, with the senior management in Germany. We did not want to
export the Post Office to Germany, we actually wanted to import
the expertise of this company to the Post Office. We have put
in the normal controls, but we have left them to continue to run
it under our control. It is that which has meant we have not had
problems with franchisees, because those franchisees have been
working with the group for a long time. The second thing is that
a lot of the work over the last two years has been to restructure
the company into one company. While we still have 24 franchisees,
there is a lot more central control over the whole of the organisation
than there was before, leaving the franchisees to do the last
bit of the route.
68. I was intrigued by something you said. I
was interested that in the report they talk about a very innovative
computer programme which allows you to track parcels and that
a Europeanwide system has been set up for parcels along similar
lines. Have you made use of that in the United Kingdom and could
you quantify for us some of the benefits that you perceive the
German Parcel operation may be able to deliver to what everyone
accepts is a difficult operation here in the UK under Parcelforce.
(Mr Roberts) We were in the process of trying to introduce
exactly the same kind of technology and the same operational setup
as the Germans already had. In the parcels industry it is now
the accepted norm that the best way to run it is to have one central
big sorting centre and then spokes coming out of it. For many
years in this country we have not had that. We were able to complete
the building of one in the middle of last year and we are now
introducing track-and-trace technology; in fact we are about half
way through that. The fact that when we took over German Parcel
in 1999 they already had that experience meant we were able to
bring some of their expertise in already running a modern hub
and running the technology back across to our people at the stage
we were building our own hub and developing our own technology.
It was also very important because we changed positions with a
British company called United Carriers in May of last year. They
had originally been the British end of this wider network called
General Parcel. When we bought German Parcel, after a period of
time, after negotiation, we exchanged Parcelforce for that. General
Parcel has a set of rules, as you can imagine, particularly based
on common technology and it meant that our technology then had
to link in with this wider European network. We have had quite
considerable advantages in terms of learning from the experience
that German Parcel already had.
69. How central was that to your original decision?
(Mr Roberts) It was absolutely key. We had seen synergies
with Parcelforce. We had looked at two cases, one stand alone
and one whether we could get synergies out of our own business.
We were particularly concerned about the market pressures over
here in the way Sir Michael has already described. The ability
to bring both Parcelforce here and the Germans into a linkage
was absolutely central and that was part of the strategy we discussed
with Ministers and officials.
70. Sir Michael, you read out earlier a quote
from the guidance given by Government suggesting that borrowing
must be commercially robust. The Chairman pointed out the comment
on page 25 about the deal being financially neutral. I want to
press you on this. Are you still in a position to view this as
a commercially robust deal?
(Sir Michael Scholar) Yes, I am. By commercially robust,
we meant that it should be consistent with a strategy which Ministers
had agreed for the Post Office, that it should be based on reasonable
assumptions about the revenues it might generate and the costs
which it might encounter and that it should have a proper appraisal
of the risks, legal, regulatory and so on, which it might face
and that those risks should have been dealt with. I believe that
on all those counts it scored well and that as we look at it since
the acquisition, it has continued to score well.
71. You are reassured on all the points you
have just mentioned.
(Sir Michael Scholar) Yes, I am.
72. One or two things have come up from today's
meeting which I should just like to follow up on. Firstly, the
impression I got from reading the report, was that this whole
business was something of a rushed job. The Department were not
really ready to monitor them in the way expected and from the
PO's point of view they really did not have the time to look at
the thing in the detail they would have liked, in particular perhaps
looking at the individual franchisees and so on. Do you accept
that it was a rush job?
(Sir Michael Scholar) I would not say it was a rushed
job. The Post Office had been considering this acquisition for
some time before they came to the Department in the early autumn
of 1998. At that time they expected that the acquisition would
fall comfortably within the £75 million threshold at which
the Department would begin to scrutinise. The new policy which
the Department was following was that for the smaller acquisitions
the Department would not be concerned at all. It would leave the
Post Office with its commercial management, with its strong business
non-executive directorship to get on with it. The Department would
not try to second guess it. As the Post Office investigated this
partnership, this acquisition, they realised that the value was
not so much in the hub, which they thought might be a £20
million deal, but in all these 24 franchisees and in the rest
of the system. That began to take the value of the transaction
up well above the £75 million threshold. It was several months
into the autumn before that became clear to the Post Office. As
soon as it became clear to the Post Office they told us and then
we got into the business of getting ourselves a professional adviser
from outside. From then onwards the thing did pick up speed, but
I would not say it was a rushed job.
(Mr Roberts) The one thing which changed as we were
going through this was that we suddenly became aware through the
vendors that there was about to be a change in German tax law
which was due to come in on 1 January 1999. This was something
which did happen during that period. As a result of that, if the
deal had not been signed before 1 January the vendors were not
going to sell because they would have lost money because of the
tax change. Therefore just towards the endnot during the
process when we were developing this and having discussions with
the Departmentwe did have to rush a bit at that stage.
We were very satisfiedin fact we tried extremely hard given
that this was the first big acquisition we had made, to do all
the necessary work and if we had not been satisfied at the end
that we could convince the Department that it was a sensible acquisition
or, in my case, convince the Board, then we would not have gone
forward with it.
73. We are told in paragraph 2.3 that you first
approach German Parcel in early 1998. What month was that?
(Mr Roberts) I cannot remember precisely. It would
have been in the first quarter of 1998. At that stage we were
looking at them as a possible contract partner. We did not realise
at that stage, even though we were looking at the German market,
that they might be for sale. We were looking for somebody who
would take our business at the other end. As we got into discussions
with them, which would probably have taken us towards the middle
of that year, it then became clear that they were prepared to
contemplate sale. As the fourth largest parcel carrier in Germany,
which is the biggest market in Europe, and two of the other three
were not for sale and the other one was going to be too expensive,
that was the point at which we really got into the process of
looking at the evaluation of whether it would be worth buying
74. When did you get to know that it was going
to cost you more than £75 million?
(Mr Roberts) We would have got to know that fairly
soon after we began talking seriously. That would have been about
the summer of that year. I remember going to Ministers in the
early autumn talking about the strategy and that this was a potential
acquisition, probably in parallel with talking with officials.
It would have been round about the summer of that year. Once we
started talking and we understood what their turnover was, that
would have given us the indication that it was going to be outside
the £75 million.
75. When you started talking to Ministers when
did you expect the acquisition date to be?
(Mr Roberts) We would probably still have expected
at that stage the acquisition to be the first quarter of 1999,
about two or three months later than we eventually did it. That
was where there was the compression just at the end. We finally
completed the deal on 7 January 1999 and I guess if we had been
left to our own devices without the issue in Germany, it might
have taken another month or six weeks.
76. Paragraph 2.3 tells us that you were warned
in August 1998 that the acquisition might be going to go ahead.
The target of that acquisition was apparently only named to you
in October 1998; for some reason two months to tell you who the
target was. Is that correct? Did you take two months, Mr Roberts,
to tell them what the target was? It appears to be what it says
in paragraph 2.3, if I have got it right.
(Sir Michael Scholar) There was a period during which
we knew they were planning on acquisition. There was a code name
for the acquisition and it took some time before they told us
the identity of the company.
77. Was there any particular reason why you
were secretive about the name of the potential acquisition at
that point? Two months to tell the Department.
(Mr Roberts) No, I do not recollect.
78. It is what it appears to say. In paragraph
2.3 it says "In August 1998 the Post Office informed the
Department that it wished to proceed with a major acquisition
and, in early October 1998, named the target company formally".
It seems rather an odd thing to have kept secret from the Department,
that is all.
(Mr Roberts) I cannot answer that from memory I am
afraid. I can find out. I cannot think of any particular reason
unless it was that we were talking about an acquisition in the
German market as opposed to a particular company. That is the
only thing I can think of.
(Sir Michael Scholar) Normally one starts with a code
name for reasons of commercial confidentiality and security.
79. Between the Post Office and the Department?
I do not see any reason for confidentiality between the Post Office
and the Department.
(Mr Roberts) I have just read the sentence, I am sorry.
I think there are two things. The first thing is about the strategy.
We would have been talking to the Department at that stage, in
the way Sir Michael described earlier, about our approach to Europe.
We would have been saying to them that where we wanted to start
was in the German market. What I would guessand I am guessing,
I apologiseis that it would then have been October before
we were clear that there was the likelihood of a deal with this
particular company, German Parcel. We may have been talking to
them at the time. We were certainly talking to one other company
at the time, which was also operating in Germany. That is the
only thing I can think of. There is normally no reason at all
why we would have spent two months, if I may put it this way,
concealing from the Department what the target was. We have not
done that on any of the acquisitions. Sir Michael is looking at
(Sir Michael Scholar) This sets out all the dates.
(Mr Roberts) We would have been talking about the
strategy at that stage and certainly talking about the German
parcels market, but I would guess it would not have been until
the later date that we knew for certain that we were then not
going to have a contract with German Parcel but that we were actually
into something which looked like an acquisition. I think both
of us would say that in relations between us and the Department
we normally try to get to the Department as soon as we can the
target name of a company we are going for. There is no point us
trying to conceal it at all.