Examination of witnesses (Questions 300-317)|
TUESDAY 7 MAY 2002
300. That would be very helpful. If I could
take that one step further. In the exercise of its role as the
shareholder that is not something which DTI Ministers do collectively?
The Secretary of State presumably would always be involved in
the exercise of the power of the shareholder?
(Mr Alexander) I would not want to talk in the generality
but I can tell you in the specific I worked extremely closely
with the Secretary of State during these discussions. Indeed,
it is one of the areas where both of us were appointed to our
respective positions in June of last year and there was a meeting
held. There was an approach made to us, as I say, by Consignia
at that stage that they wanted exploratory talks to be taken forward.
To be honest, I cannot remember but it was probably the Secretary
of State who signed the letter in July indicating that we would
accede to these exploratory talks being taken forward in formal
discussion. In terms of who has been working on the detail of
this, clearly it was myself in terms of my responsibility for
postal services and also the Secretary of State was given report
of these matters under discussion.
301. Have you authorised or have Ministers authorised
the management of Consignia to enter into any other discussions
of a similar nature with any other party?
(Mr Alexander) No. I would also say that Allan Leighton
discussed this and we reached agreement that talks should not
be taken forward in March of this year. In terms of his appointment
as Chairman we have made clear to him that there is a very significant
responsibility for him in terms of sorting out some of the challenges
that were described previously so in that sense the focus of his
work and the focus of Consignia is dealing with all the issues
we have been discussing previously.
302. Can I go back to a couple of points. You
said to us that what was the subject of discussion was the Royal
Mail and Parcelforce elements of Consignia. Roughly how much are
these bits of business worth? I should know but I do not.
(Mr Alexander) To be honest, in terms of valuation
in these negotiations, as I am sure you will appreciate, there
is a degree of sensitivity.
303. Let me put it in a slightly different way
then. In the terms of reference of the letter which you or the
Secretary of State signedand I am obviously paraphrasing
because I have never seen it, and I am trying to grope my way
towards itwas it seen that a merger was the desired outcome
or was it seen that a takeover would be a possibility? Perhaps
not the prefered option but an acceptable one?
(Mr Alexander) As I recollectand, forgive me,
I do not have the letter in front of methe discussions
involved a merger, as I say, both of the Parcelforce element of
business but also of Royal Mail. It would have been a very significant
304. If we are talking in terms of a merger,
and not talking in terms of sums of money but talking in terms
of proportions, am I right in saying that the parameters for a
merger are that one side should constitute no more than 60 per
cent and the other no less than 40 per cent of the new body that
would be established. Is that correct?
(Mr Alexander) Tempting though it is to be drawn into
305. It is a question of fact.
(Mr Alexander) Forgive me, if I can try and explain.
I would be very hesitant to discuss before the Committee any of
the particular details around valuation given the sensitivities
of the issue. In terms of the position of around 40 and around
60, my understanding (although, as I say, it is an understanding
and perhaps if it would be helpful I will write to you) is that
broadly those figures are taken within the City as being a reflection
of a merger rather than a takeover.
306. We were a wee bit disappointed because
the impression we got from Mr Roberts from Consignia was that
there were a couple of chats. We got the impression that someone
jumped on a plane and went over to Amsterdam, had a blether, came
back and said, "I do not think it is a very good idea."
The fact it took eight months to get to that position is another
matter. At the time, to be honest, we were not very well briefed
and we are not very well briefed at the moment because you are
not telling us very much! If I can get back to the point, however,
if you have a thrusting, effective Dutch-led international postal
service and you are a rather beleaguered and in some areas under-invested
British postal service cum Parcelforce which is renowned only
for its poor service and bad profits or non-existent profits,
if you are going to have a merger there it might be rather difficult
to achieve and so, figures notwithstanding, would a takeover by
the Dutch have been a politically acceptable outcome to the discussions
we were talking about?
(Mr Alexander) First of all, we did not reach a view
in terms of the public interest because the discussions did not
reach that far. In terms of the original remit it was in terms
of a joint venture and certainly not in terms of a takeover. That
would be the starting point. Perhaps it might be helpfuland
I am appreciative of your sensitivity to some of the disclosure
issues - if I explained some of the thinking behind our acceding
to those discussion being taken forward at all, given the rather
uncharitable description of the strategic rationale for it that
you have just offered. There had been a view (and this was expressed
by this Committee in 1998) that we were missing significant opportunities
in the post office internationally and that we needed to seek
to catch up with some of our potential major international competitors
in a liberalised market-place. The Dutch post office, as you indicated,
is a highly successful business. It has a tremendous record not
just in terms of recent productivity but in terms of industrial
relations. It is a well-run and well- managed operation. There
was a view, and it was at least worthy of consideration, that
we give thought to exploring discussions with Consignia to inform
those discussions whether there was scope for a joint venture
leapfrogging the competition in terms of giving us some of the
advantages that being part of a complete distribution company
internationally could have offered. If you look at the high value
markets that the Dutch are in, their excellence in terms of logistics,
there would have been some issues that were at least worthy of
consideration, given some of the problems you have described with
Consignia. You were right to identify value for money as being
an important consideration in all of these factors. That was clearly
an issue for Consignia itself in terms of the commercial discussions
that were being had and which were weighing heavily in terms of
any deliberation which we ultimately made, which as it transpired
we were not obliged to make because the deal did not come to fruition.
307. Businesses can change because of a variety
of things. Two options would be a merger or an acquisition. The
acquisitory power of Consignia by the Act is somewhere of the
order of £75 million, is it not? That is as far as the boat
can be pushed out without other things being brought in. Obviously
you could not acquire the Dutch postal service, therefore it had
to be a merger, and what I am not very clear about is whether
the rock on which these discussions foundered was that you did
not get on with them at the end of the day or alternatively that,
in fact, Britain and its Royal Mail and Parcelforce was going
into this as the junior partner in what would ultimately be seen
not as a merger but as a takeover such was the beleaguered and
debilitated state of Consignia's Parcelforce and letter delivery
(Mr Alexander) My starting point would be to emphasise
the fact the discussions being taken forward from last summer
to March were on the basis of a joint venture and not on the basis
of a takeover.
308. If the joint venture could not be a joint
venture because of the difficulties in valuation then it would
have been a takeover and that would not have been politically
(Mr Alexander) I would make the point to remind the
Committee that Ministers were not in the room during these discussions.
309. I am sure you had a glass to the wall.
You would not have been doing your job if you did not.
(Mr Alexander) It is fair to say we were involved
in those discussions and there was a range of issues on which
this deal foundered which included regulatory issues and which
included industrial relations. There are a range of different
factors which in terms of assessing
310. You are not going to tell me that the Dutch
have worse industrial relations than Consignia?
(Mr Alexander) I do not think they have had a strike
in ten years.
311. Exactly, so we can set that one aside.
The one-day general strike might have been an option but apart
from that what are the other ones?
(Mr Alexander) There were a range of issues including
industrial relations, and discussion on valuation of course formed
a central part of the negotiations that took place, but I would
not be in a position to put numbers against that. I am sure you
appreciate that because of what were highly confidential discussions
being taken forward between two potential parties.
312. We will finish on this point. If it were
not possible for it to have been a merger, and it certainly was
not possible for Consignia to acquire the Dutch post office, then
am I right in saying that it was a political non-starter?
(Mr Alexander) You are inviting me to answer a hypothetical
question. If you were to tell me that the Dutch post office will
appear tomorrow and say, "We want to take over the Royal
Mail" or whatever part of the Consignia business, that really
is a separate question from what happened last March which was
on the first hand that there could not be agreement reached between
the parties on a range of different issues, which I regret are
covered in terms of the confidentiality agreement that was reached
to start these discussions but, secondly, we would clearly have
retained rights as Ministers to deliberate upon any potential
deal as to whether it advanced the public interest. Factors we
would have weighed in the balance would have included the ability
to deliver benefits for the company itself, its customers, its
workforce and taxpayers. There would have been a range of factors
but we were never called upon to exercise that judgment.
313. I am just trying to think of what the paragraph
would be in the report that we would produce on this matter. I
am inclined, and my colleagues might just nod in agreement or
not, to say that: "The Committee was not convinced that the
discussions with the Dutch post office and final agreement foundered
on anything other than a difficulty over valuation and the likelihood
that it would be very difficult for a British Labour Government
to sell such a deal to the country."
(Mr Alexander) Of course, it is the right of the Committee
to draft the report as it sees fit. I am merely reflecting the
fact that issues that were very live and had not reached agreement
between the parties included, for example, industrial relations
and the degree of risk inherent in that and issues in terms of
the regulatory framework which were potentially present. Were
the Committee to see fit to draft such a paragraph, what you are
convinced by or not is your domain, but I would certainly hope
it would be reflected that the Minister indicated that there was
a range of factors not agreed between the parties. The other point
it would perhaps be helpful for me to make is it is appropriate
and consistent with commercial freedom that management be given
the scope to have these discussions. Equally, on reflection, when
one considers some of the acquisitions that have been made historically,
there are questions which could be asked of management in terms
of the wisdom of those individual commercial judgments. There
clearly has been a process of learning under way in terms of the
operation of commercial freedom but the approach we adopted here
was reflective of the right balance, which is, on the one hand,
to allow talks to take place, and if there was a compelling strategic
rationale for this deal to be done according to the management
then it was right that we give them the scope to explore it. On
the other hand, it was equally right that as Ministers we retained
the right to exercise our ultimate judgement in the public interest
were such an agreement to be reached (which in this case was not
Sir Robert Smith
314. To avoid management going round in circles,
would it not help them to know in principle whether you had any
objections to them selling equity in the company?
(Mr Alexander) The acceptance that they could take
part in exploratory discussions had been on the basis of their
approach to us in the summer of last year when a joint venture
was mooted. There had been form with this in the sense there will
be a joint venture on a much, much smaller scale in terms of the
international mail with both TPG and Singapore Post. In that sense
to what we gave our assent was discussions focusing on the potential
for a joint venture.
315. Currently you draw the line at selling
the company or part of the company?
(Mr Alexander) Two issues. First of all, it is a question
of what should be the focus of management at the moment and, frankly,
I do not think it should be either on acquisitions or individual
strategic partnerships but I think it is appropriate for us to
say that the commercial freedom that they have been granted leaves
it open to them to come forward in the future with proposals that
they think make sense. We will equally make a determination in
terms of public interest at any point in the future when such
proposals are brought to us. It would be fair to say the focus
of management, in agreement with us, should be on getting the
company on a stronger foundation. In that sense there is a stream
of work which was being taken forward from last summer with our
agreement in terms of strengthening management information, strengthening
the board and trying to make sure a decision that needs to be
taken could be taken. At the same time there was clearly a management
focus on one strategic answer to some of the challenges that this
company faced. We were willing to accede to those discussions
being taken forward because they convinced us it was at least
worthy of the consideration to answer some of the problems historically
identified not least by this Committee in terms of the work of
Postcomm. At the same time we were developing work being taken
forward in the autumn of last year in terms of putting the company
on a stronger foundation. In that sense when it became clear in
March of that year that there was no common ground between the
two organisations, we were in a position very quickly, with the
appointment of Allan Leighton as Chairman of the organisation,
to take forward other steps that needed to be taken. Those were
painfully difficult decisions in terms of the first stage of renewal
of the company that followed on very quickly from the basis of
work that was being taken forward, particularly in that case Parcelforce.
There is now a stream of work being taken forward in terms of
strengthening the organisation.
316. You will be aware that the interests of
management and the interests of shareholders can differ. Although
you said you were not present and Ministers were not present at
these discussions that took place, it would not be without precedent
inside the Department of Trade and Industry for such discussions
to happen where officials were present or indeed where the Department
appointed its own advisers to be present so that before the discussions
ended Ministers could conclude whether there was some value to
be gained for shareholders which was being subject to a negative
view from management because management were trying to protect
themselves rather than the interests of shareholders. Can you
tell the Committee that you feel confident that all the opportunities
that might have been available to the Government as shareholder
were fully examined, whether or not they were desirable from the
point of view of Consignia management?
(Mr Alexander) I will make two points. First of all,
if you look at the report that was produced in terms of the acquisition
of German Parcel, there was a clear direction to the DTI to make
sure it had the expertise and strength to give exactly the kind
of advice that you have just suggested. Secondly, prior to your
arrival at the session this morning I had already accepted before
the Committee that there are circumstances in which, not least
in terms of the proposals to the regulator, there may be divergences
in the ability of the company to articulate its own management
point of view and the broader public interest articulated by the
Government. Consistent with exactly that, we did appoint advisers
to ensure that we were adequately briefed in terms of what would
be our interests as shareholder from any potential deal that was
317. And before discussions closed you took
that advice as to whether there was scope for discussion beyond
what the management was advising?
(Mr Alexander) We were receiving advice from our advisers
about the discussions. The nature of these discussions are probably
well-known to you. In that event the pace and speed with which
decisions are reached can also be very fast. In this case it turned
out that agreement could not be reached between the principal
parties involved but we had the safeguard of independent advice
to ensure that the interests of shareholders were protected in
terms of the discussions.
Chairman: Thank you very much. We are very grateful
for the time that you and your colleagues have given us this morning.
We appreciate the timing of this because we realise that you want
to make sure, as you said at the beginning, that you cover all
the corners. I think that is important because we realise also
that a number of other committees seem to have what we would consider
undue interest in matters which are essentially of a departmental
character and we are rather jealous of that privilege. We are
also very grateful to you. You have been as frank as you can reasonably
have been expected to be. That does not mean we cannot keep asking
you questions to which you are not going to tell us the answers!
We will labour on in the vineyard and hopefully at the end of
the day we might see a better postal service because that is what
we are wanting to see.
3 Note by witness: You will recall that I said
that my understanding was that respective shares of 40 per cent
and 60 per cent in a new company would be taken within the City
as being a reflection of a merger rather than a takeover. I agreed
to clarify this. I understand that the conditions which have to
be met before a business combination can be treated as a merger
and governed by the Companies Act 1985 and by Financial Reporting
Standards 6 (FRS 6). FRS 6 contains five criteria, each of which
has to be met before a transaction can be treated as a merger.
These are: consideration of the roles played by the combining
parties; dominance of management; relative sizes of the parties;
the scale of non-equity consideration; and the treatment of minorities.
In respect of the relative sizes of the parties there is a rebuttable
presumption that if the relative sizes fall outside a 60 : 40
range the transaction cannot be considered a merger. Back