UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 227-iHouse of COMMONSMINUTES OF EVIDENCETAKEN BEFOREENVIRONMENT, FOOD AND RURAL AFFAIRS COMMITTEE
DAIRY FARMERS OF
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This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
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Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.
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Transcribed by the Official Shorthand Writers to the Houses of Parliament: W B Gurney & Sons LLP, Hope House, Telephone Number: 020 7233 1935
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Oral Evidence
Taken before the Environment, Food and Rural Affairs Committee
on
Members present
Mr Michael Jack, in the Chair
Mr Geoffrey Cox
Mr David Drew
Mr James Gray
Lynne Jones
David Lepper
Miss Anne McIntosh
Dr Gavin Strang
Paddy Tipping
Mr Roger Williams
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Witnesses: Mr Andrew Cooksey, former Chief Executive of DFB, Mr Rob Knight, former Chairman of DFB and Mr Philip Moody, former Board Member of DFB, gave evidence.
Chairman: Good afternoon. I was going to say ladies and gentlemen, but most of the audience is made up of gentlemen. Could I welcome you to this further evidence session in the Committee's inquiry into the demise of Dairy Farmers of Britain. I hope the members of the public who have been kind enough to join us this afternoon will understand that in this formal and public part of its business the Committee would want to open and reflect for a few moments on the very sad event which occurred on Boxing Day, when David Taylor, who had been a Member of this Committee since its inception in July 2001, very sadly passed away. David, in every sense of the word, was an assiduous attender at the meetings and had arguably one of the best attendance records. His contribution, without a shadow of a doubt, was very, very considerable indeed. As colleagues may know, I am retiring from Parliament when the General Election comes, and so was David, and I can remember having a number of conversations with him, talking about his plans for the future, his hope to be further involved in the National Forest - a matter near and dear to him in his constituency area - to perhaps return to work in the field of accountancy. All of a sudden, all of those plans for both David and obviously for his family were very tragically cut short. The tributes that were paid in the House earlier today reflect the fact that on all sides of the political spectrum everybody had a great deal of respect and, indeed, affection for David Taylor. He was feisty; as far as witnesses were concerned on this Committee, he was a bit like the proverbial bulldog, but in this case he had teeth. If those before the Committee failed to give an answer, he just carried on biting away at their ankles until finally he got the truth from them. I received today a letter from the Secretary of State for Defra, which I hope the Committee will not mind if I just read out, but I think it does reflect the way in which David's reputation was held. He says: "Dear Michael, I was very distressed to learn about David Taylor. I liked and admired him a great deal and I know he contributed a lot to the work of your Committee. I find it very hard to believe that he is no longer with us. He had such a thirst for life and a passion for his beliefs, we will all miss him." I will miss him enormously as a good friend, as somebody who had a wicked sense of humour, who was always respectful, but he was his own man in every sense of the word. Whilst he would work with the Committee, if there was ever an issue upon which he disagreed, he would pursue it with his own unique brand of relentlessness. He was a fantastic supporter to the Committee. He often represented us on his own when he was a rapporteur over our Rural Payments Agency inquiry and, indeed, the work on flooding which he did with David Drew. He was loyal and courteous and, above all, he was a delightful colleague and companion to have on the Committee. Like many colleagues, I was shocked and saddened to learn the news of his passing. The constituency party in his constituency in Leicestershire have lost a remarkable friend and representative and I put on record the Committee's sincere appreciation in all the genuineness that one can say, with words as our tools, for the work and contribution that David Taylor made to this Committee from him joining it in July 2001. It may well be that other colleagues would wish to make a brief contribution, but I would be grateful if we could just keep a moment's silence to reflect on the life and contribution and work of David to this Committee and, indeed, to Parliament itself. [A moment's silence followed.] If there are any colleagues who would like to express their own thoughts, please catch my eye.
Mr Cox: Chairman, since I come from a different political party from David, it is often thought that those in different parties are prevented by that from mutual respect and teamwork. Nothing could be further from the truth. David was an outstandingly thoughtful and serious Member of this Committee, with whom it was a privilege to serve and from whom it was a privilege to learn.
Chairman: I will leave it to colleagues to decide as to whether they want to participate in this particular Division - I will not be. We will just wait until the Division Bell concludes. Are there any other colleagues who wish to say something at this juncture?
Miss McIntosh: I would just like to echo what you said and I hope that we can send a copy of your comments to his family.
Paddy Tipping: I knew David before he came into Parliament and he narrowly lost
the 1992 election in North West Derbyshire, when he ran under the title, "
Mr Williams: I think we would all like to be associated with the Chairman's
comments and I do not think the Chairman has overstated anything in his
opinion, because that really reflected David's character and his sincerity and
loyalty. I did an inquiry with him,
visiting the Rural Payments Agency in
Dr Strang: David was an exceptionally hardworking and effective Member of Parliament, I feel, in the Committee but generally. He was a really nice guy to be with; a tremendous sense of humour.
Lynne Jones: I must say that I really cannot believe that David is no longer with us and that he will not be walking through that door. It was such a shock to learn of his sudden death, of which I learnt early because my assistant who works for me, her partner works for David. We will miss him greatly and I am sure that his constituents will too, because I know he was very highly regarded as a constituency Member of Parliament, as well as an excellent contributor to the work of this Committee.
Q522 Chairman: I thank colleagues for those words.
As Anne McIntosh suggests, and as I was going to do, we will send an
official copy of the record of the Committee to David's widow, Pam. I will write formally on behalf of the
Committee to her and hope that when she reads what we have said it will give
her some comfort and a genuine appreciation of the way that David was so highly
regarded by his colleagues. I thank our
witnesses and members of the public for their patience, but I am sure you will
appreciate that it was only right that we proceeded in that manner to record
our thoughts at this sad time with David passing on. I would like to move on to the formal
evidence session that we are about to do and thank Rob Knight, the former
Chairman of Dairy Farmers of Britain, Philip Moody, the former board member of
DFB, and Mr Andrew Cooksey, the former Chief Executive of the company, for
coming to join us. Gentlemen, I am
grateful to you for your kindness in giving your time. May I just reiterate something that I said at
the outset of this inquiry and just reflect for a moment or two as to why you
are here. What we said was that we were
not on a witch hunt. We were not trying
to pin the blame for the demise of Dairy Farmers of Britain on any one
individual. However, the inquiry is
designed to try and understand what went wrong with a very important part of
the dairy industry, an important co-operative within
Mr Knight: Thank you for that question and thank you for your welcome and introduction. We are delighted to be here. As Chairman of the board, obviously I worked very closely with both these gentlemen and with the board, but particularly with Andrew Cooksey, who was Chief Executive. It is important to note that the governance, the rules of Dairy Farmers of Britain were very clear in the way that the board was constructed, in that there had to be a majority of farmer directors - not less than six farmer directors - within the constitution of the business, and always the farmer directors had to be in the majority. Therefore, towards the end of Dairy Farmers of Britain's life, the board of directors comprised six farmer directors - in actuality, it was five because one resigned but that is just a matter of detail - and four non-farmer directors; four non-executive directors in modern parlance. Each of those directors brought to the table some specific range of skills, albeit finance, retail and, particularly when we acquired ACC, engineering skills. Therefore, in a reasonable question as to why were the executive not board members, the reason they were not is because it was not actually provided for within the constitution or the rules of the business. We endeavoured to work our way around that and had an extremely close working relationship with the executive. I would say on behalf of the board, and certainly as Andrew Cooksey is sitting here he can answer from his perspective, the relationship with the executive team was excellent. It was professional, courteous, friendly and testing, in exactly the same way that you would expect any board to test that of its executive. The regularity of the dialogue between the executive team and the board was fulsome. The board would officially have one board meeting per month, but often there would be two. There would be a number of sub-committees, of which the executive were always present and always provided information for the board. Outside of the meeting schedule there would be regular contact, in fact, I would go so far as to say, often daily contact, between myself and certainly Andrew and key members of his executive team, the finance director in particular. That happened throughout the life of Dairy Farmers of Britain.
Q523 Chairman: You mentioned that the board were supplied with copious quantities of information. You are a group of executives, you work closely together, you are in touch with the fine detail of the business almost on a minute-by-minute basis, did you have absolute transparency with the board or, in the nicest sense, did you have inevitably to edit or paraphrase some of the information that was passed on to them?
Mr Cooksey: I can answer that. The executive team's responsibility was to produce clear and careful information to the board, so we would produce a full management account pack that detailed all aspects of the business performance. That would be reviewed but we would précis and provide a written report to the board.
Q524 Chairman: In that management pack, for example, were the board involved in the setting of the annual budget for DFB, both from the sales and the financial point of view?
Mr Cooksey: The executive would bring together a budget, we would present it to the board and the board would either approve it or not approve it, as the case may be. In any normal corporate governance process that budget would be scrutinised. It is a £600 million business, highly complex in its structure - 2,800 employees operating from 11 manufacturing sites and 44 depots - a complex budget to bring together; you will always have to summarise it and present it in a summarised form, but with no lack of ability to access any form of detail on the back of that.
Q525 Chairman: What form of independent advice could the board have turned to if they had wanted to have another critical eye looking at the fruits of your labours in terms of the setting of the budget for each financial year?
Mr Knight: I will try to answer the question but I will come back because there is a lot of detail that we want to give to you to help. There was one other governance committee that is terribly important within the framework of this particular discussion. When we acquired the assets and business of Associated Co-operative Creameries then, in truth, what happened to the business was that the business had about 150 souls in the business, that was it, it was a milk brokerage co-operative; and then the next day we had 2,200 employees and a business of £600 million and all of the complexity, technology assets and all of that, which you can imagine goes with a business of that size. There were some issues and challenges in that in terms of communication with both the membership and also ensuring that the governance of the company could be kept at the highest level when, in truth, the board structure was that six of the directors had come from the farming community and they were passionate and committed and did an absolutely brilliant job to the best of their abilities. We were faced with a situation of saying, how do you distil some of this information down and give the board the trust that it has gone through, the rigour and the necessary scrutiny of detail that they would require. With the board's approval a separate committee called "the finance committee" was set up, which was comprised of Andrew Cooksey, Chief Executive, the Finance Director, Philip Moody, who is a lifelong financial professional, and one of the advisers to the board, who was a banking adviser, so we applied a second level of scrutiny to some of the questions that you have raised.
Q526 Chairman: Mr Moody, tell me, as a member of the board, as such, you have maintained a dignified silence in terms of the questions that I have asked. Would you care to comment on any of the issues that I have raised so far?
Mr Moody: I would be very happy to, Chairman.
My role as a director, in a corporate governance sense, revolved around
participation primarily not only in the boardroom but in two sub-committees
that I sat, one of which was, as the chairman has said, was the finance
committee. The purpose of the finance
committee was to give the financial information coming before the board a level
of detailed scrutiny so that in turn we could report to the board what we
regarded as being the key elements upon which the board needed to reflect. The finance committee had no powers, it was
simply a review and a corporate governance based committee. That finance committee met every month,
before the board meeting, it produced minutes which were circulated to all
board members, it was chaired by a farmer director and the formal members of
that committee were myself, an individual called
Mr Norman Coward, who was an adviser to the board and formerly a senior banker
within HSBC and formerly a director of one of the companies that was a
predecessor to Dairy Farmers of Britain.
Mr Knight was in attendance at most of those meetings, but he was
not formally a member of that committee.
The chief executive and the finance director attended every single
finance committee meeting.
Q527 Chairman: Just so that I can understand the detail, this finance committee was in place as part of the governance structure ahead of the purchase of ACC?
Mr Moody: No. It was put in place as a consequence of the acquisition of ACC. Prior to ACC being acquired, Dairy Farmers of Britain was a relatively small and simple business. It was primarily a milk brokerage, although it did own some processing businesses but they themselves certainly by comparison to ACC were very much smaller businesses and very much easier to understand.
Q528 Chairman: We are going to come on obviously and talk about the ACC situation in more detail a little bit later on in our questioning but so that I understand the mechanism, the actual governance structure was the board, supported by the executive group, that was the decision-making body, which effectively digested the proposal and ultimate execution of the decision to purchase ACC. The body that you have just described came along as a consequence of that.
Mr Moody: That is correct, and I would just say that the management accounts were presented and interrogated by that finance committee each month, the budget was presented in its draft form, usually in two or three iterations of its draft form before it reached its final form that went before the board. That committee frequently asked for further information on particular aspects of either the financial performance or the budget on which it felt it needed further explanation.
Q529 Chairman: But to be absolutely clear, the body you have described did not exist until ACC became part of DFB.
Mr Moody: Correct.
Q530 Paddy Tipping: I am interested in the role of farmer directors. Clearly, they brought a lot to the company but in a sense it was new territory for them and I wondered what training was available for them.
Mr Knight: It was absolutely new territory for them. Let us look first and foremost at the election process. The election process of the farmer directors was a council-controlled mechanism completely. As chairman of the board, I had no influence whatsoever in that particular process and in many respects they were given to me by the council, for all the right reasons and for the reasons that were in the constitution as it was set up. Of course, the council tried within all of their powers to select the ones who they believed would be the right calibre of individuals for the business. The next challenge for us was that immediately they were appointed, they were then in such a significant position of governance of the company and had to get up to speed very quickly. The reality was at the end of the day these gentlemen and ladies, in one instance, were professional farmers and were part-time directors. But the specific answer to your question is that first and foremost they all had quite an extensive induction programme. I was quite keen on that. It was an absolute necessity and the reduction programme consisted of time spent with me, with the executive team, with whatever agencies were deemed to be necessary after discussion with the new director, particularly a lot of time spent with the non-farmer directors who were on the board. As I mentioned, I tried to balance the board with areas of specific expertise that were necessary for the running of the business that we had then; finance, engineering, retail, marketing. Probably in reality on an eight-weekly basis, I would sit down with each of the directors and talk about progress and areas that they were feeling confident about or less confident about. To give you a practical example, if they had been in a board meeting and heard quite a lot of jargon about mergers and acquisitions that really was passing them by, to ask questions and to raise red flags so that we could handle that particular part of it. In terms of agencies, we used various agencies en bloc, for example, Plunkett, EWFP, when it was appropriate, and so forth, regular study tours to overseas operators, I can think of a couple of directors who went to the States, some went to Belgium, to Holland, to see sister businesses. At boards, we would have as and when necessary training for legal training on competition law, for example, when that law changed; unemployment law when that law changed, and at the year end, we would sit down and do a 360o appraisal mechanism to get feedback from other directors, get feedback from themselves and look to put some improvements into practice. I have huge admiration for the former directors, huge admiration for the way that they balanced the efforts of what they were having to do on farms - some of them before a board meeting had been up at four o'clock in the morning milking and having to provide relief service - so, huge admiration for the challenge that they had taken on and, within the limitations of their working life, what they achieved.
Q531 Paddy Tipping: I think you told us that you met the farmer directors on an eight-weekly basis, roughly. Was it a formal evaluation? What was the nature of the chat?
Mr Knight: Sometimes yes and sometimes no, is the honest answer to your question. The vice-chairman and I would talk, probably daily, certainly meet up once a week, and we would discuss areas that were pertinent to the running of the business, pertinent to the farmers, things that were coming up in the board meeting, what the farmers' views were, because within the board their specific area of expertise both backwards and forwards out from the board and back into the board was the information of the issues that were affecting the membership. It could be hygiene factors, it could be transportation factors, it could be seasonality, all sorts of areas. Also, they took great personal care in chairing some of the district meetings and trying to pass some of the messages that were in the business down to the grassroots farmer level. That was the specific area of real unique contribution within the board; also, within the board room, looking at the decisions that we had to make and putting an absolute farmer member perspective into the board that would counteract and balance some of the debates that were coming in from the business level.
Q532 Paddy Tipping: Was it a process in which you were saying, how is X doing, how are they growing, what more do they need to do? Was it as full an answer as that?
Mr Knight: At the year end, yes, absolutely. At the year end, I would ask them to measure themselves on the areas of performance: did they believe they were up to speed on X, Y and Z; how did they believe they coped on that particular area; what did they believe their strengths and weaknesses were; what did they like or not like about me and the way that I was handling them? A complete 360o feedback. I did not want it ever just to be an annual event, and I do not think it was. It was an ongoing dialogue with directors and that did start to establish itself so that we could have that freedom. That is the best that I can answer it.
Q533 Chairman: Could I turn to you for a moment, Mr Moody. We have just heard from Mr Knight that a
number of visits were paid to other co-operatives - in fact, the
Mr Moody: It is a very interesting question and I think that perhaps it would
be helpful if I gave some context around which the merger that created Dairy
Farmers of Britain was given because that is really where the contact certainly
with Dutch and other continental co-operatives started. If I may, let me give you that background and
then lead on to answer your questions, which will put the answers into context
for you. You are aware, I am sure, that
Dairy Farmers of Britain was formed out of the merger of two other farmer-controlled
businesses, the Milk Group and Zenith Milk.
At the time that the Dairy Farmers of Britain merger was being
contemplated, dairy farmers were going through a particularly desperate time;
milk prices were at an all-time low and many farmers were finding it very
difficult to even manage to break even, let alone earn profits, and the
industry was under very great stress and pressure. Consequently, there was a very strong sense that
farmers needed to do something to take destiny into their own hands to try and
create a longer-term sustainable future.
At that time, the boards of these two businesses were approached by a
consultancy based in Holland that had considerable experience of working with
European co-operatives; European co-operatives that had been established for
many years, had been able to build up substantial capital and assets over those
years and which had used those assets to acquire processing businesses and were
successful processing vertically integrated businesses, particularly in the
dairy sector. They encouraged these two
boards to combine to form a new generation
Q534 Chairman: That is very helpful. Can you refresh my memory as to how big an enterprise Campina was at that time?
Mr Moody: I do not have the numbers in my head, but a very substantial business and one of the major European dairy processors.
Q535 Chairman: The reason I ask that question is that if the model that was put to the founding two co-ops and their members was of a very substantial nature and visits and advice was given, again I am interested because of what subsequently occurred, as to what impressions might have been gained by members because, as you rightly pointed out, the industry was in a perilous financial state, you had two small co-ops that were going to come together to form one large - or larger - co-op, but within an industry where even the "new" co-op, Dairy Farmers of Britain, was still a relatively small player. I think I remember looking at some comparative figures, not for Campina but for Arla, which indicated that it was a €6 billion turnover business, compared with your post-ACC of about 500-600 million turnover. If we wind the clock back, what we are talking about is an example of a big business being presented as, "This is where you could be", to a very small business which had yet to develop. I was interested as to what lessons particularly the farmer members and the non-executives derived from the comparison between effectively a financial minnow in the world of European co-operatives and the big fish that had already got there. What was the impression?
Mr Moody: I think, Chairman, you have anticipated well one of the major lessons that was learned by the directors when they visited these businesses post the merger of the two to create DFB because one of the lessons that was learned was the sheer scale of those businesses compared to their ambition, as distinct to the scale of Dairy Farmers of Britain compared to its ambition. If I were to anticipate a question you may or may not be intending to ask later about what lessons can be drawn out of this whole thing, one of the lessons is to try and set anticipation and expectation at realistic levels because Dairy Farmers of Britain was always challenged in terms of having the financial resources to enable it to be able to effectively carry out what was a huge ask in terms of its strategy.
Chairman: Part of the reason, Mr Moody, that I asked that is the evidence which I read, and, indeed, some of the comments we have heard, reflected the underlying optimism of dairy farmers who accepted that it would be a long, hard road and that they would have to put their own hands in their pockets at a very difficult time, but in forming the new enlarged co-operative, they went forward with almost unreserved optimism that somehow it would be better than what they already had, and I think that was reflected in your answer.
Q536 Mr Williams: Mr Knight, I think it was in 2005, the chief executive left the company and you took over a position of combining the chief executive's role with the chairman's role, to become the executive chairman. What was the reasoning behind that decision? Was it something that the board discussed?
Mr Knight: Taking the last point first, it was absolutely what the board discussed, and the reason that I took up that challenge, for a shortish period of time, being executive chairman and chief executive, was absolutely at the board's request in order to do that. When we bought ACC and when we started to look at the issues we were facing with ACC and the different skill sets which we would need to control a business of that sort of size, that was when we decided to modify and change the people that were in the business at the time, and the DAT, and to the best of my knowledge and recollection that was done absolutely amicably. For a short period of time, I combined both posts.
Q537 Mr Williams: In terms of governance, it is not recommended really, is it?
Mr Knight: This is why it was for a short period of time.
Q538 Mr Williams: How long was it, roughly?
Mr Knight: I have to draw on my recollection: nine months to a year, perhaps.
Q539 Mr Williams: Only we have been told that the remuneration that you received during that period of time, 2005-2006, was in the region of £400,000.
Mr Knight: It probably was, yes.
Q540 Mr Williams: You think that figure is accurate?
Mr Knight: It was whatever has been printed into the accounts. I can remember that it was of that sort of order. My remuneration package has always been a "sticky" point, it has always been a source of lots of commentary, but the straightforward answer to the question was that I was employed right from the outset on a daily rate. That daily rate was subject to remuneration approval, was subject to board approval and was ultimately subject to council approval. It was published each year in the annual accounts and when the business found itself, in 2005, in the position that it did, it asked me to work on a full-time basis, and after consideration, I agreed.
Q541 Mr Williams: The daily rate was as a non-executive chairman, in the first instance?
Mr Knight: The daily rate was the daily rate they negotiated with me, it was just that it happened to be then for a full-time period, for a period of time.
Q542 Mr Williams: Could you tell us why Smith & Williamson was chosen to provide financial and other advice for Dairy Farmers? How was that done? Was it a beauty parade or did you go out for tender?
Mr Knight: Mr Moody has been involved with the business right from before I joined it in 2002, in an advisory capacity. Maybe you could qualify that from him later on. When it came to looking at financial advice, Smith & Williamson were not the only people that were involved in the financial advice that was given around the ACC acquisition, there was a whole host of different people that came in, ranging from Rabobank to other agencies. Each year, when we looked at the financial advisers that were needed for the business, then clearly we would look and discuss it as a board. In many instances, Philip Moody, who was a director of the business, left the board room whilst that particular topic was being discussed, the audit committee also discussed the appointment of advisers and the board then elected to take some decisions on which way they wanted to go. I am very confident that the governance process around the advisers was fulsome - as the minutes of the business would indicate.
Q543 Mr Williams: What was the range of advice that Smith & Williamson gave to the company? Was it just financial or was it on other matters as well?
Mr Moody: Perhaps I can answer this question by giving you a much fuller
understanding of the involvement of Smith & Williamson in Dairy Farmers of
Britain, because I suspect that there may be a misunderstanding as to our
role. As a professional, I have spent
probably 30 years of my life working with farmer-controlled businesses,
working with the farming community and have served on the boards and, indeed,
currently serve on the boards of other farmer-controlled businesses. As I am sure you will know, I am also a
director of the English Farming and Food Partnerships, a governor of the
Q544 Chairman: Just for the record, could you give us a pen picture - what did Smith & Williamson do?
Mr Moody: Smith & Williamson is the eighth largest
Q545 Mr Williams: What was the range of advice, just financial or what was it?
Mr Moody: Allow me to go on to explain that. In some senses, it was advice and in some senses, it was not advice, it was outsourced work, and that is why I need to explain the context of the arrangement. At the time of the merger of Dairy Farmers of Britain, I was acting as an adviser to the Milk Group and when Dairy Farmers of Britain had been agreed to be merged, facilitated by Rabobank, my firm was asked to come along and project manage the creation of the merger on the terms that had been agreed. That was the involvement with the business that Mr Knight referred to. Following that process, I was then not involved with the business until I was approached by Mr Knight in July 2003. The reason that I was approached was that the board had been charged by the membership with pursuing an acquisition-driven strategy. It was perceived, therefore, that the board needed to have corporate finance skills on its board and it also recognised that it needed to have within its own company a resource of people capable of prosecuting a corporate finance strategy. You may be aware that a number of very well resourced PLCs in this country will have their own employed mergers and acquisitions team. Clearly, Dairy Farmers of Britain was not big enough to go out and employ that kind of resource, so it was decided to invite me to join the board and invite my team effectively to be an outsource of that M&A project management capability that would be done in-house in a larger business. It was always understood that because of that involvement - we were, in fact, in those days, Solomon Hare, which was subsequently acquired by Smith & Williamson - that we could not act as independent advisers to the board because that would be in clear conflict with my position as a board director. For example, on the ACC acquisition, Smith & Williamson was not the corporate finance adviser to Dairy Farmers of Britain, it was the project manager that project managed the transaction in line with the board instructions. On smaller acquisitions, such as Lincoln and Golden Vale, yes, we did go ahead and advise them because the transactions were of much less significance and it was believed that there were fewer judgmental issues and more process issues involved in those acquisitions. We never provided any advice other than in relation to corporate finance work circulated around the effective delivery of transactions.
Q546 Mr Williams: Can you clarify that? When you said in terms of the acquisition of Associated Co-operative Creameries, the project managers were the advisers. Who were the project managers?
Mr Moody: We were the project managers because we project managed it internally, so Smith & Williamson project managed it on behalf of DFB, subject to the decisions of the board and the board decisions were informed by their advisers, and their advisers were independent advisers. Smith & Williamson was not the lead corporate finance adviser on the ACC acquisition.
Q547 Mr Williams: So who were?
Mr Moody: Rabobank.
Q548 Chairman: Rabobank were the lead corporate adviser on ACC?
Mr Moody: Correct.
Q549 Mr Williams: It has been put to us that there was a conflict of interest between you as your role as a director of DFB and you are a director of Smith & Williamson. You explained that and you are happy with that explanation?
Mr Moody: I think it is also helpful for you to understand the corporate governance process that operated around this, both inside Smith & Williamson and inside Dairy Farmers of Britain. All of the services delivered by Smith & Williamson were headed up by somebody other than me. The director in Smith & Williamson, who headed up the delivery of services to Dairy Farmers of Britain, was a corporate finance director called Sarah Thompson, and she was in charge and responsible for the delivery of all quality control. She directly reported to the executive management of Dairy Farmers of Britain, not to me. I operated separately as a director of the company. The decision to engage Smith & Williamson was led by the executive team and the fees that Smith & Williamson were paid were governed by fee arrangements between Sarah Thompson and the executive team and overviewed by the remuneration committee and board of Dairy Farmers of Britain. I was not personally involved in either securing work for Dairy Farmers of Britain or in delivery but, of course, in my role as strategic director for Dairy Farmers of Britain, I worked very closely with my team that were engaged to do work for DFB.
Q550 Mr Williams: Forgive me for being naïve, but you were recruited onto the board to give expertise in mergers and acquisitions and then you were dealing with the company with which you were already a director. These were Chinese walls? Surely, people looking at that from outside would think, this it is all a bit strange, a bit difficult? However, I am sure you were trying in every way to follow proper governance, but in terms of the public and people like ourselves, we are told it is not good enough to be perfect; you have got to be seen to be perfect as well.
Mr Moody: Absolutely. If you understand the work that was being undertaken, if I had not been with Smith & Williamson but I had been an individual who was recruited to work directly for Dairy Farmers of Britain as a strategic acquisitions director, the first thing I would have done is to have gone to my chief executive and said that I needed a resource of people to prosecute the strategic objectives of this company. I therefore need permission to be able to go and recruit X number of people to provide the information and to provide the support and resource that I need to deliver the strategy. Dairy Farmers of Britain chose not to go down that course. Instead, they chose to outsource on a project-by-project basis that work to a team that I could work with in my role as a director. Part of the reason that I was invited to join the board of Dairy Farmers of Britain was because I had that resource available that could be used to help Diary Farmers of Britain progress its strategic ambitions, and that was always part of the arrangement from the outset. In terms of using Smith & Williamson, it was almost an implied assumption of me joining the board that Smith & Williamson would be used provided, of course, that they provided an appropriate level of service and, of course, provided that their fees were competitive and good value for money for members. That is where the engagement of the separate engagement director and the involvement with the executive came into play in making sure that those arrangements were properly and appropriately governed. Clearly, it would have been a conflict for me to have sought to negotiate three levels.
Q551 Mr Cox: Suppose, as a director on the board, you had come to the conclusion, quietly, reflecting upon it in the watches of the night, that the policy of the board hitherto was fundamentally misconceived, and that an expansion-driven policy in an area of a commodity like liquid milk was probably not the way forward. By this time, your own firm had been recruited on a very lucrative contract to work precisely to advance the policy that you had concluded - on my postulation - was fundamentally wrong. That would have placed you, would it not, in a pretty awkward conflict of interest?
Mr Moody: Not at all. My duty would have been completely clear.
Q552 Mr Cox: That is what your duty would have been, but to the perception of the public you would have had a very powerful economic incentive not to reach the conclusion that the policy currently being pursued by the board was wrong.
Mr Moody: Personally or corporately?
Q553 Mr Cox: Well, you were a member of a firm that was clearly going to do well. Were you a partner in it?
Mr Moody: I was a fixed share partner.
Q554 Mr Cox: Therefore, there is no real difference, is there? If your firm does well, you do well.
Mr Moody: No, I am sorry. I was a fixed share partner. What that meant was that my personal remuneration was not influenced by one penny as a result of the fees paid to my firm.
Q555 Mr Cox: If one looks at the examples where conflicts of interest have been held, even employment for a firm that will do well out of a particular contract or situation has been held in the past to amount to a potential conflict of interest. My colleague, Mr Williams, said that to the perception of the public you would have been seen to have - even if only for your employer or your fixed share holding in Smith & Williamson - a direct conflict of interest, would you not?
Mr Moody: I am not denying that there was a conflict. What I am saying is that the role of my firm was completely transparent; it was well governed in terms of its corporate finance process.
Q556 Mr Cox: How could you perform your functions as a member of the board? You were obliged to do your utter best to make conclusions and reach decisions about the way forward for the co-operative. And yet, if you decided to arrest, if you had decided to be the voice on the board saying, "This policy is wrong", you would have thereby been cutting off your own firm in which you held a fixed share from a very lucrative source of work. Correct?
Mr Moody: First of all, Dairy Farmers of Britain clearly paid significant fees to Smith & Williamson.
Q557 Mr Cox: How much, do we know?
Mr Moody: We know exactly, yes.
Q558 Mr Cox: How much was it?
Mr Moody: If you will allow me to consult my notes, I will tell you, but it was openly disclosed in all of the management accounts. Dairy Farmers of Britain, whilst it was a valued client of the firm, was not of such a size that it was material to the performance of Smith & Williamson as a whole.
Q559 Mr Cox: I am not sure that is particularly relevant. What was the figure? You have it to hand?
Mr Moody: I will do, if you give me a moment. I will look it up; I have the notes here. Let me continue to answer the question before I do that. I am completely satisfied in my own mind that my judgment in acting as a director of Dairy Farmers of Britain was not at any time impaired by the conflict to which you allude. I am also completely confident that all of the work that my firm did was sufficiently open, visible and transparent to the senior members of the executive team and to the whole board that if I had behaved in the way in which you have hypothesised, that would have been open and obvious to my colleagues very quickly, and I would invite Mr Knight and Mr Cooksey to comment on that. Whilst I accept the premise of your question, I can assure you that at no time were my views inside the boardroom in any way compromised. I would say, in reality, quite the reverse. It put me in a position of a greater level of knowledge to enable me to base my opinions within the boardroom.
Q560 Mr Cox: May I say straightaway, Mr Moody, I am not suggesting the contrary to that for you personally. What I am exploring is the perception as my colleague, Mr Williams, said that it might have given rise to and the notional conflicts at least which would have arisen. In this case, it is precisely the policy of expansion that is under serious question, particularly the acquisition of ACC.
Mr Moody: And I am sure we will come to that.
Q561 Mr Cox: We will. And to have a member of the board who was recruited by the chairman, as I understand it, specifically to give financial advice, business advice of this kind, who had an interest to a perception of a third party, might have compromised him was probably on reflection unfortunate, was it not?
Mr Moody: I do not believe so. I believe that it was a major source of capability, which was injected into the company without which it would have found difficulty in pursuing its ambitions, given the scale of its ambition.
Mr Knight: There is nothing that Mr Moody has said that I would not concur with, nothing.
Mr Cooksey: From the executive's point of view, we needed a team of people to work with who had a depth of knowledge and understanding and, particularly having project managed the acquisition of ACC, we had invested effectively in an outsourced M&A team who had learnt all about the business that we had acquired. When we were looking at making infill acquisitions, they were absolutely the right team, there was no cost to our business of bringing a new team up to speed to be able to get into the detail in relation to the right reasons for acquiring that particular business. It was an invaluable resource; it was capitalising on an investment that we had made and they were very effective team of people.
Q562 Mr Cox: It is not coincidence that it happened to be the firm to which a member of the board belonged?
Mr Cooksey: That is a given, but we had invested in an outsourced team. It was not a team that was internal. Do you then invite another team of consultants to come in who then spend eight weeks trying to understand the business that you have got? The nature of acquisitions, particularly the kind of infill acquisitions that we did, was rapid, so you had to respond to the opportunities that were there.
Q563 Chairman: I think what Mr Cox is probing, and I am grappling towards understanding, is perhaps the difference between the objectivity of policy decision-making as opposed to the execution of policy.
Mr Moody: Exactly, that is the distinction, Chairman. Smith & Williamson was involved in the execution of policy, it was not involved in advising on the setting of policy.
Q564 Mr Cox: No, but you were.
Mr Moody: I was not advising. I was participating as a director; it is a different thing.
Q565 Mr Cox: You were recruited to give the benefit of your experience on the board to give advice to fellow directors in the way that directors do on boards. I think we are of a common ground. What you are really saying, Mr Moody, and I understand it, and for my part I have no reason to doubt it, that in practice you preserved your ability to give your own intellectual judgment and best business judgment and advice to your colleagues on the board, and the apparent conflict of interest, which you accept existed, was not in fact impinging on the execution of your duties as a director.
Mr Moody: Indeed.
Q566 Chairman: And was the members' council presented with this arrangement and did they comment on it?
Mr Moody: At the time that I was invited to join the board, I was invited to meet the council at a council meeting, present my credentials and present what I believed I could bring to the board of Dairy Farmers of Britain. They then voted on whether or not to appoint me and clearly they chose to appoint me. The role of my firm was reported in the annual accounts of every set of accounts during the time we were involved with the firm, so it was completely transparent and known to the council and, indeed, every single member. I attended a significant number of council meetings and on no occasion did a council member come up to me and raise this as an issue.
Q567 Lynne Jones: I want to go back to a comment that Mr Knight made some time ago when you were acting chief executive and chairman, and you said that there was a need to improve the skill set in the business.
Mr Knight: I think I said "change".
Q568 Lynne Jones: Could you tell us what changes were introduced as a result of your identification of whatever the need was?
Mr Knight: As I think I mentioned earlier, we had looked at a business that was 130 souls and was fundamentally a milk brokerage business and now, all of a sudden, we were a major employer of some 2,000 or so people. It was judged by the board that we needed to look at adapting and building on the executive team in order to provide the necessary skill sets: people who had been used to handling lots of people, used to employment law and so on. That was one of the reasons why we made the significant change that we did at the executive level. In terms of the board, as we evolved the board, then clearly there was a need with the board to look at enhancing the non-executive roles within the board and indeed, that was the time when we brought in more branding experience on the board in the form of Mr David Felwick, who had been managing director of Waitrose and deputy chairman of John Lewis Partnership, and also brought in a gentlemen called Mr Richard Fisher, an engineer of some note, who had been with the Mars Corporation for a very long time.
Q569 Lynne
Jones: You were satisfied that you had the
appropriate skill sets by the time
Mr Cooksey took over as chief executive?
Mr Knight: That was the decision of the board. We took a judgment that when Mr Cooksey finally took over, having spent some time in the business as both commercial director and then growing into managing director, and then ultimately the chief executive, that the board's skill sets were sufficient. That was the judgment.
Q570 Lynne Jones: Would Mr Cooksey care to comment on that? There were comments later on when Lord Grantchester took over about the inadequacy of the skill sets on the board.
Mr Cooksey: Defining the skill set of "the board" as in the farmer and non-executive board versus the executive team.
Q571 Lynne Jones: It is all the board, is it not? They all have their roles to play.
Mr Cooksey: Yes, but as non-executive directors. The board that I have access to as chief executive had a very complementary skill set in terms of facing into the challenges that we had by way of trying to develop brands as a business, we had complex challenges as far as customer relationships were concerned, we had a manufacturing strategy where we were investing in the restructuring of the company, so I had the independent members of the board who we could talk to and who were invaluable to our executive team.
Q572 Lynne Jones: Mr Moody, you referred earlier on to your sub-committee, the finance committee, minutes from that being made available. You also referred to documentation that was made available to the board. Was this information made available to the members' council?
Mr Moody: No.
Q573 Lynne Jones: What information was made available to the members' council?
Mr Knight: The communication with the members was fulsome in that we would meet - we being the members of the board and the executive - the regional chairman, of which there were some eight or nine, monthly, members of the board and the executive, and talk through in a communication manner and an informal manner the issues that we were currently facing - not all of them, obviously. I will come on to the reasons why.
Q574 Lynne Jones: Was written documentation made available?
Mr Knight: Presentations were given to them at those sorts of meetings and, yes, if they needed written documentation and they requested it, they would get it. I am going to come on to a particular point in a moment, if I may. There were then five to six full district council meetings per annum, which were very formal meetings. A typical agenda of those meetings would be probably about two to three hours of the executive team talking the 60 or so district chairmen through the issues that Andrew Cooksey and his executive team were facing, and in some detail. Given my business experience, I can genuinely say it was fulsome. Then there would be approximately one hour on the finances and banking and issues surrounding that. There would always be briefings from sub-committees of the board, so Lord Grantchester, who chaired the audit committee, as appropriate, would talk about the business of the audit committee.
Q575 Lynne Jones: From what date did he chair the audit committee?
Mr Knight: I would have to refer back to my notes to be precise. Approximately, he chaired the audit committee for two years.
Q576 Lynne Jones: From when?
Mr Knight: From 2005. The chairman would need to qualify that, precisely the date.
Q577 Lynne Jones: After the acquisition of Associated Co-operative Creameries?
Mr Knight: Yes, without a doubt. There would then be possibly some training sessions or communication, we certainly had major retailers talk to them, and then there would always be a board Q&A session. A very full day, five or six times a year. The issue always with the council was obviously in terms of information, they became very hungry for information, that was completely understandable as they took part in their own business. But the decision and the judgment always was about information that was confidential, that could have been damaging to the business if it got out into the wider world, that was customer sensitive, all sorts of information like that. We had to be careful about that. We were very open with the council. I was very open in terms of my desire for openness and transparency and trying to strike an understanding with the council that there would be sensitive information that we could not and would not be able to pass on to them until appropriate. I always made that very clear; always.
Q578 Lynne Jones: Apparently, a committee of the council submitted a paper to the board, I am not sure when, highlighting ways in which the capital structure could be improved. Do you remember that, and what happened about it? Mr Moody is nodding his head.
Mr Knight: I do recall, but perhaps Mr Moody can recall better than I.
Mr Moody: I certainly recall that one of the major issues that Dairy Farmers of Britain faced throughout its life was the extent to which it was able to raise capital sufficient to pursue its strategic mission. It was always clear to the board that the capital aspirations of the company would exceed either the ability or the willingness of the members to be able to finance it. But that did not detract from the fact that members were nevertheless providing in aggregate very substantial sums of money compared to their own wealth. Therefore, the form in which that money was invested by members in the company was always a matter of great interest to the members and a matter of considerable issue to the board. This was a matter that the board sought to engage constructively the advice of counsel to try and see whether a form of investment from members in the company could be struck that met the needs of farmer members and also met the needs of the company. There was a sub-committee of the council formed, under the chairmanship of Mr Roger Taylor, who was a very experienced individual within the council. That sub-committee came up with some recommendations, which it presented to the board for the board to consider in the context of its own capital structure. There was, certainly during my period on the board, a continuing dialogue about how one could evolve not only the basis of taking money from members, but also the return that one should be providing to members as investors, as opposed to members as suppliers of product to the company.
Q579 Lynne Jones: You left the board in 2008. What were the circumstances of your leaving the board?
Mr Moody: I left the board because I believed at that time that the company was in severe danger of becoming insolvent and I did not believe that it was consistent for me as a professional to stay on the board of a company that was in imminent danger of becoming insolvent.
Q580 Chairman: Would you refresh my memory, when was it that you left?
Mr Moody: It was
Q581 Chairman:
Mr Moody: 31 March.
Q582 Chairman: 31 March, because in 2008, the accounts had a clear going concern statement in them, did they not?
Mr Moody: Yes, they did.
Q583 Chairman: It was a pretty rapid deterioration of the company's position, was it not?
Mr Moody: It was triggered by a specific single event, which was that the bankers to the company issued the company with a formal notice of default, stating that in the bank's opinion, the company had created an event of default capable of enabling the bank to summarily withdraw its facilities. It was that notice from the bank to the company that triggered my resignation.
Q584 Chairman: Let us move into the issue that appears to us as mere observers the heart of the matter, namely the events that led up to the purchase of ACC. If we go back for a moment and try and draw some of the strands of the information you have been kind enough to give us, you have given us the impression that you have formed out of two small co-ops a larger business where farmers felt that they would have a greater opportunity to determine their own future financial well-being, where many had taken a long-term view of the prospects of the new co-operative - DFB - where they were prepared by various means of the £20,000 they could subscribe and the loans that they gave to the business to help capitalise it and they set off in hope and anticipation that the brokerage business would move forward in a way that you described. Implicit in that is that somehow you would acquire the shape and format of a European co-operative model where there was an element of vertical integration. I assume that model is the thing that informed the strategy of the board in the run-up to the purchase of ACC. Is that correct?
Mr Moody: That is correct, yes.
Q585 Chairman: One of the things, Mr Moody, that I am intrigued with is that you recognised the stresses and strains of trying to raise very considerable sums of capital for future investment against a basis where inevitably the owners of the company - the farmers - were constrained as to how much money they could put in formally, and also how much they could afford, because, as you rightly pointed out, you said the co-op came into existence at a time of weakness in terms of the price for, particularly, liquid milk in the market place. Mr Cooksey, you referred to what you described as "fill-in investments", which, if I have understand that, is the purchase of smaller processing and dairy production outwith of the bigger picture of the ACC purchase. Is that correct?
Mr Cooksey: They were as a consequence of the ACC purchase. There had been some smaller investments made into soft cheese manufacturing and other matters.
Q586 Chairman: Before we get to the story about how you decided to buy ACC, Mr Moody, I am interested to know whether you were involved in doing any calculations. Did you make any recommendations to the board as to bluntly just how much money the co-op could effectively afford to invest in the strategy that the board had agreed? Did you say to them, "Look, guys, this is the limit. This is how much we can afford to put forward on an investment strategy to achieve the board's objectives"?
Mr Moody: The capital requirements necessary to pursue the strategy were regularly the subject of debate within the board room. Indeed, post the acquisition of ACC, there was a separate sub-committee of the board.
Q587 Chairman: I am going to stop you, Mr Moody, because I am not interested at this moment in my question as to what happened post the acquisition. I am interested in the following: you are sitting there, you have got a plan, you are going to pursue it but, as with any business, you have a rough idea as to how much money you can afford to spend on the plan, right? Before you set off, it is like going out to buy a car, all of us have aspirations, but then we are tempered by the reality of "What can I afford?" and "How much is it going to cost to run?". You come down to the practicalities. My dream of owning some vast exotic sports car might well be rapidly tempered by the fact that I cannot afford it; I have got to have something more modest; and so I make my personal choice as to what kind of a car I might like to have. Was there a thought process like that? I can imagine around the board table the excitement of the opportunity of going into vertical integration must inevitably have been tempered by someone saying, "Look, guys, this is the kind of rough limit as to what we can afford". Did that kind of discussion take place?
Mr Moody: Yes, it did.
Q588 Chairman: What was its conclusion?
Mr Moody: Its conclusion was that the combination of funds capable of being invested by members, together with realistic levels of borrowings, which the company could take on board, was sufficient to enable it to take a step to a point where it could achieve a reasonable scale of processing vertical integration.
Q589 Chairman: Can I ask you rather more specifically, that is a lovely description in words of what the policy was that you had already decided to do. I would assume that is what you were going to do. I am interested in the back-of-the-envelope number. How much did you think you could afford to invest in pursuit of the objectives you have described?
Mr Moody: In broad terms, it was always recognised that the company could
probably enable itself to invest something between £100 million and £150
million into that level of strategy, but that would depend entirely, of course,
on what it used that money to acquire, the level of profits of the business it
had acquired and the ability of those profits to support it. What we also recognised at the time was that
if we invested that amount of money into a processing business, that would then
give us a business that had in itself two assets. The first asset was the financial return that
business would provide and the second asset was the strategic value that it
represented to the wider dairy industry.
It was widely recognised by the board of DFB that there was over
capacity in dairy industry processing in the
Q590 Chairman: That is true, but you were not a philanthropic institution, you were not going out to rationalise the dairy industry, you made it very clear from the beginning that it was the interest of the farmer members that was uppermost in your minds, not sorting out the problems of the capacity in the dairy industry.
Mr Moody: I am not suggesting that. What I am suggesting is that the fact that there was over capacity in the industry presented the opportunity to people owning assets to combine them with assets owned by others to the mutual benefit of the people who owned those assets. In other words, there would be the opportunity to derive synergistic benefits by combining them with other assets that would enable additional value to be released, and that was where the strategy had a second leg to it.
Q591 Chairman: You quoted a figure of £100 million to £150 million. Was that over a period of time, or how much it could blow on the right one-off purchase?
Mr Moody: I think your use of the word "blow" implies a somewhat cavalier attitude, which was never present within the board, or the way in which the board operated.
Q592 Chairman: What word would you use?
Mr Moody: I would use "invest".
Q593 Chairman: All right, let us chose a word that you are comfortable with. I will ask my question again. You had a potential to invest between £100 million and £150 million; was that over the pursuit of the strategy over a period of time, or as a one-off investment to achieve the strategy?
Mr Moody: It was our view that was the maximum we could reasonably invest within the foreseeable future. Obviously, the foreseeable future probably would have meant something like a five to ten-year timescale.
Q594 Chairman: A five to ten-year timescale. You could argue that if you spent £15 million a year over ten years, that would be one way of achieving it, or a different formulation of it. One comes to the question of what was the comfortable level of investment that you could afford. That £100 million to £150 million that you were indicating, was that adding up the sum total of monies that farmers had invested - the £20,000 touch - and then the loans which they made available, plus what you could sensibly borrow from the banks? Is that how it was comprised?
Mr Moody: Yes, indeed, we would never have envisaged raising all of that money from the members; it would have been impractical to have done so.
Q595 Chairman: Now, earlier on, when we were just establishing your own credentials --- By the way, have you found the figure yet?
Mr Moody: Yes, I have.
Q596 Chairman: Would you like to put that figure on for the record? We do not want to neglect that. Even though Mr Cox is not here, his question lives on in the record.
Mr Moody: The total fees paid to my firm in the year ended
Q597 Chairman: Thank you. We will consider that offer and thank you for making it. Let us come back to the run-up to the purchase of ACC. Earlier on, if I have understood you correctly, you said that the process to advise and inform how you were going to translate the strategy into reality was informed by external advice from your bankers. I think you said that Rabobank was the lead bank, is that correct?
Mr Moody: I never said that. I said that Rabobank were the financial advisers on the ACC.
Q598 Chairman: What I wrote down was, "Rabobank lead the corporate advisers on ACC".
Mr Moody: Exactly, but that is different from a lead bank.
Q599 Chairman: Let us just park that for a second. You decided on the strategy; try and give us a thumbnail sketch as to how was it that you decided that ACC was the way forward. Were there any other options that were looked at before you got to the ACC decision-making process?
Mr Moody: Yes, there were. At the time that I joined the board in December 2003, the company was already in discussion with relation to the acquisition of a different set of processing assets from one of the major dairy processors. I joined that set of discussions to see whether or not it was an appropriate set of assets for the company to acquire. There was some degree of attractiveness in those assets but Dairy Farmers of Britain had entered the process late, it was not realistically able within the time frame being set by the vendor of those assets to be able to put forward a credible bid, or for Dairy Farmers of Britain to have carried out the level of rigour necessary to satisfy itself that they would have been an appropriate acquisition.
Q600 Chairman: You mean by that, due diligence?
Mr Moody: No, it is really prior to due diligence. It is really the evaluation process; trying to understand the extent to which the business would be able to add value; the extent to which one would be able to see a long-term strategic future for it. Due diligence is very much a question of ascertaining whether or not the information that you have been presented with is factually correct and accurate. That is the way I would differentiate between the two. Therefore, that transaction was not pursued, but it did lead to an opportunity to look at a separate transaction of similar assets from a different vendor. Those discussions were considered in detail, at length, and were considered to be of strategic interest. As a result, serious discussions were entered into with the vendor, which very nearly resulted in an agreement surrounding an offer for those businesses, but ultimately did not, and those discussions terminated. By that time, ACC was being offered as an acquisition opportunity.
Q601 Chairman: Just before we get to ACC, can you give us an order of magnitude, particularly of the second option, which sounded an "almost right" sort of solution. What kind of money would have been involved in investing in the second option?
Mr Moody: Very similar. The price we were looking at was in the order of about £50 million to £60 million.
Q602 Chairman: £50 million to £60 million, so you did not quite make it with that one, and we move on then to ACC.
Mr Moody: Correct. First of all, it is helpful to understand the criteria that the board had set in trying to pursue the vertical integration strategy which, remember, its members had charged it with pursuing. There was very much a view that the company needed to become a broad-based dairy company, with the scale and power to be able to return a sustainable value to the members in the future. That was the basis around which strategic acquisitions were considered. To understand what a broad-based dairy company means, if you looked at the UK dairy industry as a whole at that time, around 50% of milk produced in the UK was being delivered to liquid assets, around 25% was being delivered to cheese producing assets and the balance of 25% was going into the remainder of the different types of sectors of the industry - condensed milk, powder, butter, et cetera. Therefore, if we were going to seek to be a broad-based dairy company once we had pursued that first stage of acquisition, we needed to make sure that either we acquired a business that had that broad base or if we were looking at assets that were only in one sector that we had sufficient investment capability left to be able to invest in other parts of the sector so as to end up with a broad-based dairy company. In the case of ACC, ACC very closely fitted that profile. It consumed about a billion litres of milk a year and about 600 million litres went through its liquid factories, with the other 400 million going through its other factories - cheese, et cetera. Therefore, it was felt that certainly in the context of having a balance across the various sectors of the dairy industry was in, it had that balance. It had a number of other features about it that made it attractive to Dairy Farmers of Britain. It also clearly had some aspects of it that made it less attractive to Dairy Farmers of Britain. It was recognised as being a processor through relatively small regional dairies rather than large super dairies, but it was also recognised that it had a distribution network that enabled it to service sectors of the industry that some of its better capitalised and more resourced competitors were not directly operating within and did not always have the distribution structure to enable it to enter into parts of the market. To help understand that observation, ACC did sell into the multiple retailer sector but predominantly through the co-operative retail trading group, whereas many of its bigger and more resourced competitors were very much stronger players in the multiple sector and focused very much on the multiple sector. ACC was a significant seller of product to what many describe as the convenience sector, the smaller regional stores and the smaller national chains, and very much more profitable parts of the sectors, margins were higher in that sector generally. It also owned a doorstep delivery business. There are two other companies that own doorstep delivery, but in the area where it owned doorstep delivery, it was a significant player and consequently derived a level of profitability from that business, albeit that it was as a national industry in doorstep delivery in decline, it was still very profitable. It was felt that there was a degree of balance across sectors, that it offered the opportunity for the business to develop its positioning within those sectors, rather than go up head-to-head in competition with its better funded and better capitalised and better resourced competitors in some areas.
Q603 Chairman: You are now convinced that you have got an opportunity that ticks a lot of the boxes that you wanted to tick in pursuing your strategy; you get your group of bankers to come along, Rabobank heading the corporate advisers, and you start looking in some detail at ACC as a business because, obviously, you have had to decide if you were going to pursue it, how much you could afford to pay for it. How do you decide what it was right to pay for it?
Mr Moody: In answering that question, let me first explain the process that ACC was offered for sale within. CWS had decided to conduct effectively a sealed bid auction process.
Q604 Chairman: Because they had got out of all of this, they had decided it was not their business?
Mr Moody: Whatever their strategic reasoning to invest and they had decided to sell. They had decided to go through a very formal process of inviting competitive tenders from interested parties for its business. CWS had a well-resourced mergers and acquisitions team, headed up by an experience M&A individual, and they also took on board financial advisers in the form of HSBC Investment Bank, who were acting for CWS at the time. They issued an information memorandum, which contained information about the business and we were invited to submit an indicative bid, by a deadline, setting out various aspects of our level of interest, along with any other interested parties. So, all interested parties were given until this date to submit their bid. In putting together DFB's bid, DFB organised itself in terms of a corporate governance process, a managed process, and it also engaged a team of professional advisers to enable it to evaluate the opportunity, and it also engaged in a club of bankers to work with DFB to help provide the finance to enable the acquisition.
Q605 Chairman: Who were the advisers?
Mr Moody: The financial advisers were Rabobank; the legal advisers were DLA - a very substantial UK law firm; the project managers were Smith & Williamson; the legal project managers were BrookStreet des Roches; and there were then other firms that we used in the due diligence process.
Q606 Chairman: Who was in the club of bankers?
Mr Moody: The club of bankers at that time comprised four banks: Rabobank itself, HSBC, Barclays and RBS. The intention was that each of those four banks would lend £25 million, presenting a funding capability of £100 million, part of which was bridging future member contributions. The board formed what was called an acquisition steering group, which was a sub-committee of the board. It was chaired by Mr Knight, I was a member of it, and that acquisition steering group met weekly, sometimes twice weekly. It was attended by advisers and it was on the basis of reviewing the detailed information provided by CWS, the advice from advisers that it chose to make its recommendation to the board. The board then considered the recommendation of the ASG. It also received the advice from Rabobank and upon that decision, the board made its decision on how much to bid in the indicative bid. So, that was the process. In terms of the information available to the ASG and to the board and to the company's advisers, the information obviously comprised that contained in the information memorandum produced by HSBC IB, acting for CWS, and Rabobank, as advisers to DFB, provided some benchmarking information to enable DFB to form a judgment as to what level it should bid for this company. That benchmarking information contained their estimation of what they thought the business was worth as a stand-alone static business; what they thought that business was worth to potential acquirers who might be rival bidders for the business.
Q607 Chairman: Who did the benchmarking?
Mr Moody: Rabobank. They provided the detailed paper to ASG and they talked it through in detail with ASG. So, this benchmarking exercise sought to guesstimate the value of the business to our potential rivals for that business. Bear in mind the rivals were existing processors in the liquids sector, in the main, and therefore were they to have acquired ACC, they would immediately have had rationalisation and synergy benefits available to them to enable them to reduce costs within the business. So, it is not surprising that the advice from Rabobank was that ACC would deliver greater value to one of them than it would to DFB, which did not have any such synergies to bring to the table. They also considered what value DFB could derive from ACC, were it to acquire it. That gave a bid range. They also evaluated what the maximum price, in their opinion, our competitors could bid for ACC if it wanted to do so without diluting their own earnings. That gave a ceiling, that was not to suggest that was the price that the competitors would bid because, clearly, they would want to derive value for their own shareholders.
Q608 Chairman: Could you put some numbers on this for us?
Mr Moody: I would suggest that is commercially sensitive information, Chairman. I would be more than happy to provide you with that information in writing provided I could be allowed to do so on a private basis. You will appreciate that we have legally-binding confidentiality undertakings in place with parties. I am also concerned that some of the companies I am talking about are publicly-listed companies and I would not wish to provide information that could be regarded in any way as sensitive to those companies.
Q609 Chairman: The Committee would be grateful to have that information, on the basis that you have described, simply because it would help us to relate the generation of advice to what is supposedly the published figure as to what you actually paid at the end of the process.
Mr Moody: Yes, I am happy to provide that information, in writing, if I can have the Committee's assurance that it will be received as private and confidential information.
Q610 Chairman: It will.
Mr Moody: Fine, I will do that after this hearing.
Q611 Chairman: Rabobank gave you some information and advice. You look at all of this and you make an indicative bid for the business. What happens then?
Mr Moody: We submitted the indicative bid and CWS subsequently sought to clarify with us aspects of that bid - as I am sure they would have done with other bidders - and they then produced a short list of people that they wanted to invite to proceed to the next stage. The next stage was effectively to provide a final bid with any specific conditions attached to that bid that the bidder would seek to impose. In order to move from indicative bid to final bid, further information was released by CWS, giving a greater insight into the business and an opportunity to meet the management of ACC in very controlled conditions was presented to potential bidders. On the basis of our ability to meet the management, question them on our ability to receive further information, that enabled DFB and its advisory team to vary or confirm some of the assumptions that it had made at the indicative bid stage.
Q612 Chairman: You go through that process, you are getting a better insight into the ACC business and we come to the point where you have to make your mind up. You know that there are one or more interested parties other than yourself in the business. How much did you know about the others who were bidding for this?
Mr Moody: We were never advised who the other bidders were, so it was summation on our part as to who they might be, but there are a relatively small number of players in this sector and so it was not difficult to guess who they might be. At the point that the final bid was issued - and I should state that it was not just the decision of the board of Dairy Farmers of Britain because we also had to have the support of the banks in this process. Throughout this whole process of indicative and bid stage, there were substantial teams within each of the banks reviewing exactly the same information that Dairy Farmers of Britain's board was reviewing and considering whether or not the view that the DFB board was coming to, was supportable or not.
Q613 Chairman: When you got to the final figure as to what you described, did all the banks agree that the figure you offered was a correct figure?
Mr Moody: Yes, they supported the offer.
Q614 Chairman: Could you, therefore, explain why I read in your board minutes that Rabobank indicated that you had paid too much for the business?
Mr Moody: We have to be careful which bit of Rabobank we are talking about. There was the bank, Rabobank, and the advisory Rabobank team. In terms of the banking club, it is perhaps helpful to explain that during the process of pursuing the acquisition of ACC, not all of the four members of the banking club decided that they wanted ultimately to lend into the transaction, for different reasons. RBS was the first bank to withdraw from the club.
Q615 Chairman: Why?
Mr Moody: I do not actually recall why. I am quite happy to look back on my files to see whether I have a note, and advise.
Q616 Chairman: Perhaps Mr Knight might assist?
Mr Knight: I do not recall either.
Q617 Chairman: We would like to know.
Mr Moody: I will do my best to advise you of that, but certainly my recollection is that the transaction team working within RBS were in support of it but it failed to get credit approval. As I say, that is a recollection, that may not be accurate and I will seek to clarify that and advise the Committee subsequently.
Q618 Chairman: RBS are out. What happens next?
Mr Moody: We have to go to the other three banks.
Q619 Chairman: We have got Barclays, HSBC and Rabobank?
Mr Moody: And we have to say to them, instead of being four banks at £25 million, will you now be three banks at £33 million? After considerable consideration, going back to their respective credit committees, they came back and said that they would support at £33 million each. So, our financing was still in place and we could continue to process our final offer.
Q620 Chairman: In terms of the Rabobank position, what you are saying is that the Rabobank bankers were on board, but the Rabobank bit that was giving you the advice, was not.
Mr Moody: No, I am not saying that at all.
Q621 Chairman: Come back to what your minutes say. The minute perhaps did not make the distinction between two parts of the same bank. It is pretty clear to me that Rabobank, a part of it, had said that the final bid price that you were going to put in was too high. Is that factually correct, or not?
Mr Moody: At the meeting of the ASG on
Q622 Chairman: It seems to me, as a layman in these matters, quite a central point. A bank, which has very considerable experience in European agricultural funding, which is continentally based and understands the co-operative model in some depth, seems to have given an opinion that was at odds with the ultimate decision that the board made, viz. the level that it chose finally to bid for ACC.
Mr Moody: The opinion was based around bidding strategy, rather than value.
Q623 Chairman: My recollection of the minutes seems to be fairly clear that it was recorded in your minutes, and I always stand to be corrected so if I have not remembered because I have not got them in front of me, but when I read them through it caught my eye. There seemed to be a clarity of expression that indicated that Rabobank basically thought that the price was too high.
Mr Moody: Rabobank thought that we did not need to bid at the level that we chose to bid.
Q624 Chairman: Are we not having a little bit of linguistic semantics here?
Mr Moody: No, I do not think we are, Chairman.
Q625 Chairman: The Rabobank said - you just used the words "you did not need to bid at the level you did".
Mr Moody: When I provide you with the information in writing privately, which I have agreed to provide to you, perhaps the comments that I am making will make more sense. The only way in which I can adequately address your challenge here and now is to quote those numbers, which I feel unable to do in a public session. What I am trying to say to you is that there were two sets of numbers. There was a set of numbers that it was advised the businesses were worth to the bidders, and then a separate set of numbers that were judgments about what one needed to offer for the business. Obviously, one would not seek to offer more than the business was judged to be worth but there might be a perception that you did not need to offer as much as the business might be worth in order still to acquire it. That is where there was a difference of opinion. There was a difference of opinion between what Rabobank believed we needed to offer, i.e., less than what they thought it was worth, as opposed to what the board of Dairy Farmers of Britain believed it needed to offer in order to be competitive in the bid process. Dairy Farmers of Britain's belief in its opinion was based around the fact that its competitors had greater value to derive from the acquisition from industrial and commercial synergies than the DFB itself could not benefit from. Therefore, if DFB offered materially less than the advice that the company was worth to DFB, then it risked being left out of the short-listing process because it may have misjudged the level at which its competitors might have sought to bid.
Q626 Chairman: Let me just remind you of what Mr David Messom, who is the director of food retail at the Co-operative Group said in front of this Committee, "My personal view is that you could argue that they [DFB] paid too much for the ACC business originally which they acquired from the Co-operative Group."
Mr Moody: If you are asking me whether, with the benefit of hindsight, I think Dairy Farmers of Britain paid too much, my answer is, yes, unquestionably. But whether you are asking me, does that imply that there was a flaw in the evaluation process, then I would say, no, there was not. I think other circumstances led to that conclusion.
Q627 Chairman: That process fully took into account all of the costs of rationalisation, further investment and the fill-in acquisition, which Mr Cooksey alluded to earlier in the evidence. In other words, it was a total picture that led you to bid £81 million that ultimately you paid for it.
Mr Moody: The basis of our financial evaluation of ACC was based on information provided by the management of ACC through CWS and CWS's advisers, HSBC IB. What they presented to us was historical financial information together, with financial projections of the business, covering the financial years 2005 through to including 2007. We took those financial projections and applied over them a Dairy Farmers of Britain overlay, so we added to them the existing DFB business, then we applied to it any changes that we were intending to bring to the business post acquisition. That created in aggregate an acquisition plan around which the evaluation and funding capability of the business was considered. That business plan was subject to review by the banks, it was subject to review by PWC, who reported both to the banks and to the board of Dairy Farmers of Britain on it, and it was also subject subsequently to due diligence, which no doubt we are going to come on to discuss. But that plan supported the price of £75 million.
Q628 Chairman: But I presume that it was also totally underpinned by an assumption that there would be no material change in the newly-formed enlarged customer base that you were hoping to serve.
Mr Moody: It was underpinned by the assumptions that were inherent within the financial projections that were presented to us.
Q629 Chairman: You maintained Barclays, HSBC and Rabo as the three finance banks for the project and you then embarked on your due diligence. When Lord Grantchester gave evidence to the Committee, he said that all of a sudden you subsequently discovered what he described as a potential huge tax liability of some £6 million, which you managed to avoid after only spending £1 million on advice. He also went on to say that you discovered a number of commercial contracts that were uncompetitive. He finally noted, "We even began to question how they put the due diligence together as to where the profit of one division stopped and the next division started." That does not sound like a ringing endorsement for the due diligence process and yet, if that was the case, Mr Moody, as somebody well versed in these matters, you believed all of it in the first instance, did you not?
Mr Moody: The vendors chose to operate what is called a vendor due diligence process. A vendor due diligence process is where the vendor engages a firm of financial advisers, instructs them to carry out due diligence on its own numbers and then presents that information to the purchaser. Whereas, in the case of a transaction that is prosecuted without a vendor due diligence process, the purchaser would normally appoint its own agents to go in and carry out its own review of the numbers. Vendor due diligence is a process which, at the time, was frequently used by major corporates in auction processes where they believed there would be strong interest, and particularly in circumstances where potential bidders would be competitors. It was an intent to control the exposure of the business, which they then still owned, to commercial risk and exploitation by competitors. Dairy Farmers of Britain, of course, was not a competitor in that sense but, nevertheless, it was required to agree to participate in the vendor due diligence process or withdraw from the process. As an experienced corporate finance professional, I have an inherent dislike of vendor due diligence processes because I personally believe - I am not suggesting in this case it was so - but I personally believe there is an inherent conflict of interest for the firm being invited to carry out the vendor due diligence, because it is engaged by the party selling the business and not the party buying the business. However, that is the set of circumstances in which we found ourselves.
Q630 Chairman: It was take it or leave it, basically?
Mr Moody: It was take it or leave it, yes. The financial due diligence was prepared by a firm called KPMG. KPMG provided extensive DD reports on the historical trading data but did not provide, initially, commentary on the financial projections. The financial projections were, of course, of acute interest to Dairy Farmers of Britain and its bankers.
Q631 Chairman: Would I be right in saying, because I am not an accountant by training, but I had a quick look at the due diligence report, and I struggled to find anything where it was - easy perhaps is the wrong word - but none the less I shall use it, nothing that seemed to be an indicator of what the worth of the business was going forward.
Mr Moody: No, that is not the purpose of due diligence. Due diligence is not there to express an opinion on value. It is there to provide information and express opinions on information to enable somebody to understand whether the information that is being reviewed is reasonably based or financially accurate.
Q632 Chairman: But it does have a significant part to play, if not in terms of the financial projections to which you yourself mentioned a second ago, as to what the real worth of the business is. In other words, are there any skeletons in the financial cupboard?
Mr Moody: Absolutely, without question. As we proceed with this discussion it will become clear where the problems of Dairy Farmers of Britain began to emerge. Within this process, having been presented with vendor DD on historical information, it was made clear to CWS and its advisers that Dairy Farmers of Britain would be unable to proceed with its acquisition interest if the due diligence did not extend to commenting on the financial projections going forwards. As a consequence, an addendum to the vendor due diligence report was prepared by KPMG, where they reviewed the financial projections upon which Dairy Farms of Britain were relying, in terms of not only arriving at its value, but also securing its banking support to acquire the business. In due course, that due diligence report was made available. That due diligence report contained a number of comments within it indicating that aspects of the financial projections were challenging. Its overall conclusion was that the underlying assumptions arrived at by the ACC management in setting those projections were prudent. That conclusion gave the comfort to Dairy Farms of Britain to its advisers and to the banks that the projections were capable of being relying upon in pursuing the acquisition. I am sure you will appreciate that with a transaction of this size and with the credit committees of the banks involved, those projections were given a very high level of scrutiny and, of course, the assumptions underlying them were also given a high level of scrutiny. There were various elements that provided that comfort, alongside the comfort provided by KPMG.
Q633 Chairman: Did the assessment of these financial projections also include proper sensitivity testing, bearing in mind variations in potential sales level, because at the end of the day, it is what you get for selling the output of ACC, which is going to determine whether the financial model works or not?
Mr Moody: Correct. There were three key areas of sensitivity. The first area related to the business operated from a plant in South West Wales called Llangadog, which was a canning plant owned by ACC. That business was disclosed to us as having been historically loss-making. We were aware of that in any event because of public concern in the area of the factory and, indeed, I stand to be corrected, but it is my personal recollection that prior to the acquisition of ACC by DFB, concern was expressed that led CWS to state categorically that it had no intention of closing Llangadog. So we knew that Llangadog had a troubled history. The financial information presented to us stated that as a result of increases in retail prices and cost reduction measures effected by the ACC management, those losses had been stemmed and the financial projections demonstrated an elimination of those losses and a modest return to profitability for Llangadog. That was one of the key sensitivities. The second key sensitivity related to volume being sold to its principal customers. Volume had been declining and there was a concern about whether that volume was going to continue to decline or whether it was likely to be reversed as the financial projections suggested. Ultimately, comfort was received in respect of that by the announcement that a significant sales contract had been struck by the ACC management with a third party, with a four-year duration, which effectively more than supported the revenue projections contained within the financial projections. The banks and DFB have the comfort that its principal customer, the Co-operative Retail Trading Group, were secured in terms of a three-year supply contract to 2007, where the prices were specified with adjustment mechanisms specified in the contract and that there was also a four-year contract in respect of this other significant party. We considered that if we were buying any other processing business without such customer revenue contracts in place, the probability would have been that as soon as we took over ownership of the business, retailers would seek to use that as an opportunity to renegotiate prices and margins, and therefore we were protected from that risk through those contracts.
Q634 Dr Strang: We have got to August 2004 and you have acquired the ACC. It has been suggested to us that it really took you a very long time - a year - to really grasp some of the problems that existed within ACC, that was after you had owned it. You have said something about the plan you had for ACC, perhaps we could hear more about that. But also, could you say - we are now talking about post acquisition, leaving aside the background to it, which you have explained admirably, if I may say so - anything about that, given where you were once you had got this business, why did it take so long, apparently, to get to grips with the problems, to some extent what were the problems and what would you have done differently looking back?
Mr Moody: Let me give a comment, but I am sure the chairman will also want to
comment on that. First of all, it did
not take us a year. I know that Gerry
Smith made that statement in his evidence, but Gerry Smith was not involved in
the liquids business until the middle of 2005, and therefore it would have been
outside his knowledge. In fact, the
underperformance of the liquids business was identified as early as November
2004, when a formal report was written identifying that the business was
generating profits materially below those anticipated within the financial
projections that had been presented and reviewed at the time of the
acquisition. There were two principal
reasons for this. The first reason was
that contrary to our understanding at the time, Llangadog had not returned to
breakeven, it was suffering very considerable losses as a factory. Dairy Farms of
Q635 Dr Strang: This is a four-year contract, you said?
Mr Moody: Correct. And that was a fundamental and material undermining of the profitability of the business. When I said earlier that we overpaid for ACC, had we known about the losses in Llangadog and had we appreciated the nature of that contract, then we would unquestionably not have paid the price that we did.
Q636 Chairman: Could you help me for a second to understand what you have said. What was the factor that prevented you from knowing about the implications of this contract?
Mr Moody: The sales process itself was very much on the basis that there was not open and unrestricted access to what the vendor regarded as commercially sensitive information. I would point out that is quite normal when a company is selling a business where potential bidders are competitors. So I am not implying for one second that the process pursued by CWS was in any way improper or in any way unusual, but it was nevertheless very restrictive for somebody seeking to gain full and complete information about the business it was acquiring.
Q637 Dr Strang: Could you have done something differently to deal with these problems? Obviously these problems were inherent, as soon as you got the business you got these problems, could you have done something different to sustain Dairy Farmers of Britain against that horrific acquisition.
Mr Knight: As Philip Moody has explained, we were landed with two issues here - one was this long-term supply contract and the second was Llangadog. With Llangadog, we acted very swiftly on that particular business. It was more difficult with the contract that was set up and that we inherited. The reasons that you are investigating quite correctly investigating and the reasons also that Philip Moody's is explaining in some full detail equally reflects an accurate answer of events. That contract was there soaking up the milk and for us at that time it was a non-profitable contract. So the issues in the liquid division started to emerge at that stage and we started to work through negotiations with the key customers to try to ease the situation, and they proved to be tough.
Q638 Dr Strang: Given the scale of this acquisition, obviously in the context of how big Dairy Farmers of Britain was at the time, it was a huge decision for Dairy Farmers of Britain to take. In retrospect, it is hard to resist a conclusion that was what it was all about, your final demise was predetermined once you had made that acquisition. Is that fair?
Mr Moody: No, I think that is unfair. Had the business delivered the level of profitability that was anticipated at the time of the acquisition, then the acquisition would have been successful with some margin for comfort. Bear in mind that the financing of this business was totally driven around the profitability and the cash flow that we were expecting to generate from it. That determined our ability to service bank debt; it determined our ability to service the member investment that the members had made in this business; and it also determined ultimately our ability to influence the price that we were going to pay our members for our milk. That was overwhelmingly the purpose for which Dairy Farmers of Britain was created - to build an improvement in the sustainable milk price. That was always our criterion. We did not need to look at an acquisition on the basis of providing an investment return, we needed to look at it on the basis of providing a sustainable purchaser for the members' milk and improving prices for that milk. That did set us apart from the other bidders who obviously had shareholders and investment returns that they needed to take into consideration. Of course, the amount that one pays for a business is an important factor, because whatever you pay has to be financed and has to be repaid at some point. With the benefit of 20/20 hindsight, it was not the price that we paid for this business that caused the problem, it was the lack of profitability in it that we discovered once we had bought it that was the problem.
Q639 Dr Strang: I understand that, but there were some inherent problems there which, with the best will in the world, you could not really tackle.
Mr Moody: No. Let me give you a chronology of just how we tried to deal with that because it will help you. In the period from November 2004 through to the end of 2006, the executive management were very strongly challenged by the board to look at all ways of seeking to drive cost reductions and greater profitability out of the business. They came up with a range of initiatives, which were called PIPs - profit improvement programmes. There were a huge number of different initiatives running within the business at any one time. In my judgment, the executive management did an exceedingly good job in beginning to turn the business round in that period, 2005-2006. There was a belief that as we approached the end of 2006, the business was getting back on track and that there was an opportunity therefore to start to derive the kind of benefits from this business that we believed were there at the outset. Unfortunately, what followed 2006 was 2007, and two material events happened during 2007, which fundamentally changed the financial prospects for Dairy Farmers of Britain and, in my judgment, proved ultimately to be something from which the business was unable to recover. Andrew Cooksey may want to talk about those events in more detail, but I will identify what they were. The first event was, of course, the CRTG contract came up for renewal in August 2007.
Q640 Chairman: For the record, what is CRTG?
Mr Moody: Co-operative Retail Trading Group - you have had Mr David Messom giving evidence before this Committee. Like any retailer, of course, they are always looking to derive the best value for their shareholders and for their consumers, that is their job, and CRTG did that job, so that when they put the contract up for renewal, they put it out to open tender. Clearly, that provided an opportunity to competitors of Dairy Farmers of Britain to seek to put forward some very competitive prices. As a result of that, DFB was left with a choice of whether to renew its contract on what proved to be the price terms available to it. It was in a kind of a cleft stick because the prices being offered were materially lower than was currently being enjoyed. Now, market conditions change and I not for one moment suggesting that there was anything improper about that process, I am merely stating the facts. The facts are that the contract was renewed at a considerably lower value than it had been under the old contract. That caused evaporation of value to DFB, which DFB had to address. The second issue related to a freak of nature, in that the weather that year caused a shortage of milk, which meant that processors had to increase significantly the price that they were prepared to pay per litre to enable them to secure their milk supplies. There was a very rapid escalation of milk price over that period. Unfortunately, Dairy Farmers of Britain did not have significant balance sheet reserves and it could not afford to pay a price to its members for the milk that it had not yet secured from its customers. Whereas, some of its larger competitors had the ability to anticipate future market moves in order to step in and gain milk supply. DFB's price went up substantially over that period, but it went up slower than many of its competitors and that caused a significant degree of membership concern, believing that this was an indicator of an underperformance within the business.
Q641 Chairman: Is that what led eventually to the beginning of the members indicating that they were going to withdraw?
Mr Moody: Yes, that started the resignation.
Mr Knight: That was a critical moment and I think that was the turning point in the confidence point of the business.
Q642 Chairman: Was that one of the contributory elements to the loss of the Co-op business? In evidence to us, they cited four reasons, one of which was low milk price to members; they felt that you were not looking after your members properly.
Mr Cooksey: Yes, that would be one of the elements. The other aspect in terms of the overall member confidence was that there was a lot of noise in the industry overall and that raised question marks.
Q643 Chairman: Would I be right in saying that those of your competitors that were sniffing around for that Co-op business could afford to be almost predatory in their pricing, knowing that they had got the balance sheet strength to sustain a very competitive bid, whereas you were struggling?
Mr Cooksey: It was a significant piece of volume, probably one of the last remaining significant pieces of volume, that was up for renewal within the market place at that time. Other companies had invested significantly in increasing capacity and clearly there were marginal benefit opportunities available to other customers, whereas the Co-op was our primary customer. It is very difficult to marginally cost your largest customer.
Chairman: Gentlemen, we could go on, but I am very conscious that you have been here for the best part of two and a half hours. I am sure if we had all the farmer members who have been in touch with us, they would probably have a legion of questions that they would like us to ask you. We have done our best to reflect in our questioning the major area of concern, however, which was the acquisition of ACC, because it is quite clear from what you said that from that followed the seeds being sown that ultimately led to the downfall of the business - the lack of profitability that you have referred to, and the ultimate loss of a major customer. There is only so much that any business can take and still continue to trade successfully. As you said, with the benefit of hindsight and the discovery of certain facts because of the bidding process, you would argue that there were things that you discovered that made your acquisition less profitable than your model that encouraged you to acquire the business had suggested. Those would be the main bones that I would pick out of what you have told us. Could I thank you in advance, Mr Moody, for the information that you will send the Committee, which will be treated in confidence. I think you can see very clearly what we are after to get an idea with numbers as to how this process of acquisition finally worked out. There may be on reflection some further points that we might want to raise with you in correspondence, but may I take the opportunity of thanking you for coming here to assist us with our inquiry. I hope it will not be too long before we can draw this matter to a conclusion. In fairness, there were many farmers who wanted to hear what you had to say. You are now on the record and for that, I am very grateful.