Report by the Comptroller and Auditor General NATIONAL AUDIT O-ICE

Department of Transport: Sale of the National Company

Ordered by the House of Commons to be printed 20 November 1990 : HMSO E5.45 net 43 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

This report has been prepared under Section 6 of the National Audit Act, 1983 for presentation to the House of Commons in accordance with Section 9 of the Act.

John Bourn Comptmller and Auditor General National Audit Office 13 November 1990

The Comptroller and Auditor General is the head of the National Audit Office employing some 900 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies use their resources. DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

Contents

Pages Report

Introduction 1

Arrangements for the sale 1

The outcome of the sale 5

Other sale matters 9

Summary 11

Appendices

1. Advertisements for the Sale of the National Bus Company 13 2. National Bus Company: Estimated net receipts from the sale 17 3. Description of seven operating subsidiaries 18 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

Report

Introduction 1. The National Bus Company (the Company) was formed in 1968 to take over the bus assets and shareholdings in and of the Transport Holding Company and certain bus interests of the British Railways Board. By 1985 it employed some 49,000 staff, had an annual turnover exceeding E800 million and, after the receipt of operating subsidies of El21 million, had an operating profit of some El8 million in 1985. At this time the Company accounted for almost 50 per cent of local bus mileage in England and Wales.

2. In 1984 the Government published the White Paper “” (Cmnd 9300) which proposed major changes to the bus industry. The main objective was to open the industry to competition through the deregulation of local bus services outside London and the introduction of competitive tendering for non-commercial services. To ensure competition a major restructuring of the industry was proposed, including the privatisation of the National Bus Company into smaller free standing parts. The Government considered it important to the success of the policy that each of the changes - deregulation, competitive tendering, restructuring and privatisation - be carried out on broadly the same timescale so that no one operator could dominate the market.

3. The sale of the Company differed from all previous sales of public enterprises in that the Company was charged under the with privatising its component parts in accordance with a programme agreed with and monitored by the Department of Transport and subject to the approval of each sale by the Secretary of State. This Report concentrates on the Department’s arrangements for overseeing the sale, the outcome and related issues. The National Audit Office observations are set out at the end of the Report.

Arrangements for (i) The sale objectives tbe sale 4. The legislative framework for the sale was set out in the Transport Act 1985. This required the Company to submit a programme to the Secretary of State for the disposal of the whole undertaking. The Company’s main objective was to promote sustained and fair competition, both between the Company’s subsidiaries and between them and other bus companies. The Company was also required to have regard to the net value that might be secured from all disposals and to give all employees a reasonable opportunity of acquiring a controlling interest in that part of the organisation for which they worked.

5. The Act required the Secretary of State: (i) to approve the Company’s disposal programme or modify it as he saw fit;

1 DEPARTMENT OF TRANSPORT: SALE OF TEE NATIONAL BUS COMPANY

(ii) if necessary, to formulate proposals of his own in substitution for the Company’s proposals; and if necessary, to vary the approved programme; (iii) where necessary, to give directions to the Company as to the manner in which it was to carry out its main objective and associated duties; (iv) to give consent to all disposals either generally in relation to disposals of any specified description, or specifically in relation to particular disposals.

The Act also required the Company to complete the sale within three years of the legislation coming into force, ie by 6 January 1989.

(ii) The disposal programme

6. In 1984 the Government had announced its intention, as part of its policy of increasing competition in the industry, to reorganise the Company into smaller free-standing parts prior to privatisation. In the autumn of 1985 the Company’s preferred option was to dispose of itself as a single unit. It considered this would be the best method of promoting fair and sustained competition and of giving employees the best chance of gaining control of their companies.

7. The Secretary of State’s view, however, was that to maximise competition within the industry the subsidiaries should be sold individually and should, if necessary, be restructured to provide greater local competition. The Company proposed that five operating units should be restructured. The Secretary of State’s decision was issued in a direction in February 1986, requiring the Company to divide four further subsidiaries into 12 new operating units.

8. In April 1986 the Secretary of State issued a further direction instructing the Company to sell its operating subsidiaries as individual units and to dispose of as many as possible before 26 October 1986 when bus deregulation outside London would become effective.

9. In May 1986 the Company submitted a disposal programme to the Secretary of State which complied with the above directions and met the conditions set out in the Transport Act. The programme set out the Company’s intention to offer the individual subsidiaries for sale and actively to pursue negotiations with local management and employees. The Company would also continue, where appropriate, to advertise for sale all subsidiaries and to review progress with the Department each month. This programme was approved by the Secretary of State without modification.

(iii) Incentives to employees

10. At the end of 1985 the Company invited management teams to prepare bids and, early in 1986, the Department of Transport sponsored a series of seminars on management buy-outs for employees. The Secretary of State, with Treasury consent, agreed that the Company could:

2 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

(a) exercise up to a five per cent pricing preference to management or employee groups when considering bids, and (b) meet a proportion of the costs of mounting unsuccessful bids up to a maximum of E48,415 per bid.

(iv) Monitoring of the sale

11. The Department appointed Price Waterhouse in May 1985 to advise on all aspects of the sale. In May 1986 they also appointed Richard Ellis to advise on property matters. Both advisers were appointed following competition. The Company employed and were advised throughout by the merchant bankers, Barclays De Zoete Wedd. They also employed their own legal advisers, Slaughter & May, and property advisers Healey & Baker and King & Co. During the sale the Department and their advisers maintained a close working contact with the Company and were well placed to advise the Secretary of State.

12. The Company’s strategy, agreed with the Department, was to start the sale process for each subsidiary when it became ready for sale. Progress was dependent on a number of factors, including the readiness of local management to mount a bid, the need to restructure some subsidiaries and create new management teams, the availability of detailed information on each subsidiary for third parties and the ability of the Company to respond to enquiries. The Department accepted that the Company had to decide in each case when negotiations should begin.

13. An advertising campaign was undertaken in the national, regional and trade press. An initial advertisement in March 1986, listed the subsidiaries and invited general expressions of interest. This was followed by a second campaign in September 1986 under the theme “70 great names for sale”. In October 1986 further advertisements were placed in the specialist trade press. Copies of these advertisements, which did not target individual subsidiaries, are at Appendix 1. In addition to these advertisements, the Company made a number of direct approaches to parties mostly in the transport industry, who it thought might be interested in bus operations.

14. As part of the marketing strategy, an information memorandum was prepared for each subsidiary and these were sold for E50 each to all those with an interest in purchasing a company. These memoranda were prepared by the Company after consultation with local management and their legal advisers. Price Waterhouse reviewed and criticised the approach to and content of the early memoranda and these were revised before issue. The Company also employed six independent consultants as negotiators to manage the sale process by liaising between subsidiaries and potential purchasers.

15. The marketing approach of the Company was reviewed by the Department and its advisers and discussed with the Company in the period leading up to the first sales. After the sale of the first two operating subsidiaries the Department asked Price Waterhouse specifically to review the marketing. Price Waterhouse recognised the value of the Company’s

3 DBPART?,ENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

early advertisements but suggested, amongst other things, that the Company should consider employing marketing consultants to advise on potential interested parties in the and abroad.

16. Price Waterhouse also believed that, since the sale was to extend over a period, there was a need to create and maintain interest by careful use of different forms of advertising and by using local press and radio to maximum advantage. They considered that the Company should have a planned and co-ordinated approach to marketing over the full term of privatisation so as to ensure that appropriate exposure was achieved for each subsidiary as it became available for sale.

17. The Company Chairman advised that since the sale of the National Bus Company’s subsidiaries was being widely covered in the national and specialist press no interested parties could be unaware of the disposal. There was a good level of awareness in the business community and he considered it unlikely that much interest would be generated from outside the transport industry. He preferred to rely on direct approaches to companies which were expected to have an interest but who had not responded to the advertisements. The Department accepted the Company’s advice to continue with direct approaches and, where appropriate, to undertake more local advertising. Six subsidiaries were advertised individually: and National Travelworld, which were specialist concerns, and the four London Country subsidiaries.

(v) Property sales

18. At 31 December 1985 the fixed assets of the Company were valued at 8360 million, of which some ;E114 million represented freehold property. Both the Company and the Department were concerned about the possibility of their new owners asset stripping and each employed their own property consultants. Following advice from Richard Ellis, the Department agreed that the Company should obtain three valuations for all properties, based on the open market value for existing use, the open market value with vacant possession and a third value which assumed that planning consent for alternative use would be forthcoming. 19. The Companyconsidered each caseon its merits. Where appropriate, non-operational property was removed from the control of a subsidiary and sold through National Bus Properties Limited. In other cases, where a property could not be separated from a bus operation and it had a high alternative use value [compared to the existing open market value), the approach was to establish and reflect the enhanced value in the price paid for the subsidiary. Where these options were not practical, the Company negotiated the use of a mortgage charge which was designed to claw back for the Company a share of any enhanced development value realised on that property during the ten years following the sale. This was typically 55 per cent of the increase in value if the property was sold within the first four years after the sale, and 65 per cent thereafter.

(vi) The consideration of bids

20. There was no established market for the sale of bus companies; and deregulation and the proposed changes to the subsidy regime raised

4 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

doubts about the future profitability of many of the subsidiaries. As a consequence, the sale of the Company was initiated at a time of great uncertainty for the industry. The sale and the confidence of the market was also influenced by the impact of the general election which took place in June 1987, mid-way through the sale period.

21. At the outset the Department were advised that, in order to judge the acceptability of an offer, a realistic benchmark value should be assessed for each of the subsidiaries, particularly where there was only one tender. The Company argued that the market would decide the value of companies and their main concern was to negotiate the best possible price. It agreed that no subsidiary would be sold at less than its break up value. The total break up value of the subsidiaries would have left a deficit of some s66 million (Table 1).

22. The Company and their advisers considered each bid and recommended a favoured bid to the Secretary of State. Price Waterhouse provided separate advice to the Secretary of State on each proposed sale. This covered the market situation, marketing, the number of interested parties and bids received and the offer price in relation to net book value and break up value. Where appropriate, the firm also considered price earnings ratios but in around forty per cent of the sales subsidiaries were not forecasting profits at the time of sale. In addition, the uncertainty of future trading conditions made it difficult to adopt profitability and earnings forecasts as a reliable measure. The firm also considered whether alternatives such as delaying the sale, re-marketing or restructuring the subsidiaries would enhance net proceeds. Price Waterhouse gave this advice relying on the Company’s submissions to the Secretary of State and other enquiries they made of the Company and of the subsidiaries.

The Outcome of the 23. The estimated proceeds of sale are E324.2 million. After taking into Sale account inter-company transactions, repayment of the Exchequer loan of E96.4 million, financing costs, costs of sale and taxation on the one hand, and of the estimated surplus on pension funds of El20 million on the other, the aggregate net receipts to the Exchequer are expected to be El65.4 million (see Appendix 2).

24. The Company had 72 subsidiaries for sale but because a number of these were sold together there were 62 separate sales as detailed in Table 1. With the exception of Victoria Coach Station, all of the bus and engineering subsidiaries were sold as going concerns over a period of 21 months and well within the three year time limit for the sale. Appendix 3 provides illustrative information about seven of these sales. Additional proceeds amounting to some E76 million at November 1990 arose from the sale of non-operational property through National Bus Properties Ltd, the disposal of other properties, assets and investments and the release of mortgage charges.

25. An analysis of the information in Table 1 shows that: (i) 18 of the 62 sales were negotiated with single bidders and 13 of these sales occurred during the first seven months of the sale period. In these 18 cases, aggregate proceeds amounted to some f33 million,

5 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

Table 1 Analysis of sales (This table shows for each sale the net proceeds and the main financial information used to assess the adecmacv of the bids received) p;‘;y-;-:;:~ :; !.,,i, :;~,“,,$ : ,_,, ,, I ,~<: ,: . ,-..,- : ,,,,,: .,,. t.,. .’ : “ ~W’hzw~r i.”

Month of Name oE Subsidiary No. of Management Nei sale interested boyouts Proceeds parties (No. * (Note 1) bf bids) fin date fin

,“I 1986 1. National Holidays 19(41 2.3 0.3 16.0 - Aug 1986 2. General 3 111 * 3.4 c 5.8 23.7 1.8 Sept 1986 3. 9 (11 * 2.3 c 4.5 12.2 3.0 act 1986 4. and 2 11) * 1.0 2.4 9.5 -1.0 Ott 1986 5. 4 PI * 1.1 1.5 4.3 - No” 1986 6. Maidstone and District 3 (11 * 1.8 3.7 7.5 -1.5 IJec 1986 7. (West) l(1) * 1.9 4.9 0 -0.3 Dee 1986 8. Potteries Motor Traction 6 Ill * 2.6 3.8 8.8 -1.8 Dee 1986 9. Eastern National Omnibus 4 (11 * 5.2 7.8 9.4 4.9 Dee 1986 10. South Midland 5 (11 * 0.4 1.0 4.4 -0.2 Dee 1986 11. Trent Motor Traction 6 (1) * 1.7 2.2 3.4 -3.4 Dee 1986 12. Cambus 4 Ill * 1.5 3.0 4.2 -1.0 Ja 1987 13. City of 9 (31 * 2.6 c 0.8 6.5 -0.3 J= 1987 14. West Riding Coach 3 (11 0.7 2.3 0 0.2 Jan 1987 15. West Riding Auto CO 4 11) * 3.5 9.0 8.7 -0.3 J= 1987 16. Traction 8 (1) * 1.4 4.1 6.4 -3.0 Feb 1987 17. Eastern Counties Omnibus 9Pl * 4.5 3.1 5.9 -0.7 Feb 1987 18. Engineering Subsidiaries WV 3.7 c 8.7 0 -0.7 Feb 1987 19. East Yorks Motor SeNk 6 (21 * 1.0 2.9 14.2 -2.0 Mar 1987 20. East Kent Road Car company 6 13) * 2.5 c 3.2 10.0 -3.8 Apr 1987 21. BUS Company 4 PI 2.2 c 2.8 6.4 -0.1 May 1987 22. Brighton and Hove 6 (21 * 1.0 2.8 0 -0.9 May 1987 23. Provincial Bus 6 (21 f 0.7 0.5 8.6 -0.6 May 1987 24. Northern General 4 (31 * 3.0 6.1 11.7 -6.3 May 1987 2.5. Transport 4 (a * 3.0 4.0 14.1 -1.2 May 1987 26. National Welsh Q (3) * 2.6 2.2 9.2 -5.4 Jun 1987 27. Wilts and Bus CO 7 (51 I 3.0 c 1.7 4.7 -1.5 JUl 1987 28. Shamrock and Rambler Ltd 7 (11 cl.3 0.9 33.7 -0.7 Jul 1987 2% timberland Motor 8 (21 2.8 1.4 16.9 -2.3 Jul 1987 30. Wessex National Ltd 9 (4) * 0.5 1.1 101.5 -0.1 Aug 1987 31. Ltd 6 (41 3.0 c 4.6 17.6 0.1 Aug 1987 37.. Milton Keynes City BUS 6 (1) * 1.2 c 1.8 33.5 -0.3 Aug 1987 33. Luton and District 7 01 * 1.7 c 1.5 23.5 -1.0 Aug 1987 3.~. West Yorkshire Car CO 11 161 4.9 c 6.7 16.1 -1.4 hg 1987 35. Midland Fox 11 (3) * 2.6 3.5 24.4 -1.3 Sep 1987 36. Omnibus 10 (51 1.8 1.6 0 -4.8

6 DEPARTMENT OF TRANSPORT: SALE OF l-m NATIONAL BUS COhwANY

Table 1 Analysis of sales (This table shows for each sale the net proceeds and the main financial information used to assess the adequacy of the bids received)

assetsat sale of bids) date em

Sep 1987 37. Voyage National SA 7 (1) 0.1 “.I 0 -“.8 Ott 1987 38. Northumbria 11111 * 2.4 2.9 0 ml.9 act 1987 39. Southdown 12(41 * 7.0 4.6 0 0.1 Ott 1987 40. South 9 PI 1.1 1.8 0 -1.5 NO” 1987 41. Ambassador Travel 10 (41 I1.7 1.1 0 0.2 NO” 1987 42. United Counties 16 (61 4.0 c 2.8 27.1 -0.6 IJec 1987 43. Midland Red (South) 20 (7) 2.8 1.5 0 1.3 I mc 1987 44. Crosville Wales 18 (4) 3.0 4.8 0 0.4 Dee 1987 45. United Auto Services 6 17) 6.3 c 2.8 0 -3.3 Dee 1987 46. Hastings & District * Transport 7 13) 0.3 0.7 0 0.4 Dee 1987 47. Berks & Bucks Bus CO 19 @I 2.0 c 3.0 0 -0.5 Jan 1988 48. London Country North West 16PI * 3.7 3.7 0 0.1 Jan 1988 4% Midland Red (North) 14(51 5.9 1.8 45.8 -0.6 Jan 1988 50. Lincolnshire Road car 19(9) 1.6 1.3 0 -0.8 Feb 1988 51. London Country south west 1513) 3.0 2.7 0 -4.6 Feb 1988 52. Gatwick EnSineerinS 10(3) 0.8 1.4 0 0.1 Feb 1988 53. East Midland Motor Service 29 (IO) * 5.5 0.6 17.6 -2.5 Mar 1988 54. N Devon Ltd & S National 24 (15) * 3.5 3.0 0 -0.9 Mar 1988 55. Ribble Motor SWJiC~S 26 (41 * 8.0 5.6 0 -4.4 Mar 1988 56. London Country NE 20 (61 3.6 3.4 0 3.0 Mar 1988 57. Crosvtlle Motor 24 (5) 6.8 4.3 0 -2.6 Mar 1988 58. Ken&h Bus 17 (4) 2.4 3.2 0 -1.0 Mar 1988 59. N Western Road Car Ltd 21 14) 1.3 1.3 0 -2.8 Mar 1988 60. National Express 38@I * 10.1 0.4 10.0 - Mar 1988 61. National Travelworld 5101 2.0 1.3 0 0.6 Ott 1988 62. Victoria Coach ,.. ~. xanon (Note 3, 25.9 1 6.2 N/A N/A

Totals N/A 36 f1932rn f194.5m N/A E-66.3rn

1. The net proceeds do not include receipts from clawback arrangements on prop&y. c denotes a sale where a mortgage charge was used. 2. 0 indicates that the company was not forecasting profits at the date of sale 3. Far traffic policy rea.son~ the Secretary of State directed that this subsidiary should he sold to London Regional Transport at an independent market valuation. 4. The sale prices and P/E ratios reflect the value placed upon the companies at the time they were sold taking account of the nature of the assets, any restrictions placed upon them (such as mortgage charges) and the uncertainty of future earnings in the 1iSht of deregulation. 5. The break-up value represents the estimated proceeds from disposal of assets less liabilities and closure costs. Source: The information shown in Table I was taken from documents submitted to the Secretary of State with recommended bids.

7 DEPARTMENT OF TRANSPORT: Sm OF THE NATIONAL BUS COMPANY

a discount against net book value of some 62.9 million (or 46 per cent). In the 14 instances where subsidiaries were forecasting profits at the time of sale, the average of the price earnings figures for these subsidiaries was 13.5.

Figure 1

Average number of interested third parties and bidders by time period

Average no.

July-Dee 86 Jan-Jun 87 Jul-Dee 87 Jan-Mar 88

(ii) In the 44 sales which involved competitive bids, sale proceeds amounted to El60 million, representing an aggregate premium against net book value of E27 million (or 20 per cent). Of these 44 sales the averageof the priceearnings ratios for the 21 saleswhere the subsidiary was forecasting a profit at the time of sale was 18.5. (iii) As the market began to settle down after deregulation and the number of subsidiaries for sale reduced, the amount of interest and the number of bids increased markedly. (This feature is represented graphically in Figure 1.) (iv) In general there was a higher return against net book value towards the end of the sale period, even though many of these subsidiaries were not forecasting profits at the time of sale. (v) 36 of the 62 sales were to employee or management teams. (vi) In many of the early sales price earnings ratios were in single figures, which would indicate that buyers might recoup their outlay in a relatively brief period. However, the Department have stated that this reflected the greater uncertainty of the market at that stage and hence the risk to the buyers.

8 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

(i) Extra publicity

26. In two specific cases the Company was forced to call for fresh bids. In both cases, although this caused delays of around three to four months, there was much more interest in the companies when they were re-offered for sale. The additional competition resulted in aggregate proceeds being increased by some f3.5 million or 40 per cent. The Department were advised that this was due to the extra publicity generated by the retendering exercise, but also to the realisation by some interested parties that the number of subsidiaries available for sale was diminishing rapidly.

(ii) The effectiveness of the negotiators

27. The National Audit Office examined the effectiveness of the Company’s negotiators on management bids in the 37 cases where the information was available. The results, set out in Table 2, show that the negotiators were extremely effective in improving bids. In those cases where management were the only bidders, the negotiators were able on average to increase their bids by some 50 per cent and, where there were other bidders, by some 100 per cent.

Table 2 Analysis of Management bids

I ; $I,# ,: ,*; ,.,,. X<‘;,_ S’& ;*; y,v” I,+ ,*#i,:, i “,” :‘“““:~~~ra.~‘,~,~;.~j,~,-;,_; I 4r,, e-r* i i: “‘,r’>*,” /& ; *ii#*,.;*n~ ,,,. ~:,““,,d,Lr’.~~~;“. . ;-;;<$;: :;,,:y; $ *fa :/ :>~,<;;$>, I, r e ., ;j::r,,ii ,,, ” ” : ‘f : ‘7; *, ,;,; r ;~ ,? Smg&bbldy~ us -M&$+&j+*,~~ i ,: ), ,,, ,, ,..,, I , i , ,,, ,, i o$ :E-id; ,, ,,.

Number of cases 11 26 Average initial offer f1.16m fl.22m Average final offer E1.75m E2.59m Average Increase fO.5!3m f1.37m (Percentage increase) (51%) (112%)

(iii) Costs of Sale

28. The Company’s audited realisation account shows the costs of the disposal programme to be some E6.2 million, excluding the cost of selling property separately. These costs include those of the sale negotiators, professional advisers, publicity and the Department of Transport. They represent some two per cent of gross sales proceeds.

29. In addition the subsidiaries incurred costs of some E6.4 million for restructuring which was more than recouped in sales proceeds. These costs include the launching of the new companies, re-location and new equipment, professional fees and redundancy costs. The Company had also agreed to meet certain contingent liabilities connected with the sale such as specific redundancy costs. These liabilities amount to 64.6 million and have been set against gross proceeds.

9 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

(iv) Property

30. The Company had over 1500 properties of both an operational and non-operational nature. Most of this property was sold with the operating subsidiaries, but non-operational property and some other property was sold separately, either by National Bus Properties Limited or by the Company itself, realising some E44 million. In 14 sales where property was sold with a subsidiary the Company placed a mortgage charge on 18 properties along the lines described in paragraph 19. This clawback arrangement has resulted so far in an additional E6 million receipts from the six charges which have been removed (see Table 3). The Department have indicated that further sums are likely to be realised.

Table 3 Receipts from the release of mortgage charges

Devon General 1 0.154 Badgerline 2 3.25 ENEL Engineering 1 0.784 West Yorkshire Road Car 1 0.167 Berks and Bucks 1 1.8

TOTALS 6 6.155

(v) Pension Funds

31. The Company had two pension funds, the National Bus Pension Fund for salaried staff and the Bus Employees Superannuation Trust for other employees. In order to protect the benefits accrued before privatisation and the future index-linking of those benefits, the Trustees agreed revised arrangements which: [a) allowed subsidiaries a 16 month transitional period during which they could continue to participate in the funds after they ceased to be part of the Company; (b) established arrangements for the winding up of the funds, subject to the preservation of existing benefits of members and pensioners through an insurance company: and (c) secured payment by the Company of any additional contributions on winding up to maintain benefits, with any surplus to be repaid to the Company.

32. The surplus on the two superannuation funds is currently estimated at f120 million after tax (E200 million gross). The final surplus will not be known until the winding up of the funds has been completed, but the Company expects any adjustment to this figure to be small. An interim payment of E83 million has been made to the Department and the balance

10 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY of the El20 million will be paid over when authorised by the Superannuation Office of the Inland Revenue. The National Bus Company is expected to be wound up by the end of the financial year.

33. In the light of this examination, the National Audit Office found that: (i) The Secretary of State, after taking advice, directed the Company to sell its operating subsidiaries as individual units (paragraphs 6-9). (ii) During the sale the Department and their advisers maintained a close working contact with the Company and were well placed to advise the Secretary of State; this accords with the previous recommendations of the Public Accounts Committee (paragraph 11). (iii) Following an advertising campaign in the national, regional and trade press, the Department accepted the Company’s advice to continue with direct approaches and, where appropriate, to undertake more local advertising. Six subsidiaries were advertised for sale individually [paragraphs 13-17). (iv) The Department and the Company took considerable care to safeguard the taxpayer from having property resold for a profit after privatisation. Non-operational property was removed from the subsidiaries and sold separately, realising some g44 million. Claw- back arrangements on property left with the subsidiaries have so far realised an additional f6 million for the Company (paragraphs 18-19 and 30). (v) The Company rejected the suggestion that individual benchmarks should be assessed for subsidiaries since the market would decide the value of companies. The Department were provided with independent advice as to the acceptability of each bid (paragraphs 21-22). (vi) Aggregate net receipts to the Exchequer are expected to be f165 million (paragraph 23). (vii) The Company sold all the operating subsidiaries as going concerns well within the three year time limit (paragraph 24). (viii) 18 of the 62 sales were negotiated with single bidders and most of these were made at substantial discounts against the net book value of assets sold (13 in the first 7 months when market conditions were particularly uncertain); average of the price earnings figures for the 14 sales where profits were being forecast was 13.5. As the sale progressed and uncertainty receded, competition generally increased and sales returns moved from deficit to premium against net book value: over the same period the average of the price earnings ratios also generally increased (paragraph 25). (ix) 36 of the 62 sales were to employee or management teams (paragraph 25). (x) In two specific cases where the Company called for fresh bids, there was increased publicity and proceeds were increased by some 40 per cent (paragraph 26). (xi) The negotiators were extremely effective at increasing bids (paragraph 27).

11 DEPARTMENTOFTRANSPORT: SALEOFTHENATIONALBUSCOMPANY

(xii) The costs of the disposal programme are estimated to be E6.2 million, some two per cent of gross sales proceeds (paragraph 28). [xiii) The surplus on the winding up of the pension funds is expected to be about E200 million, El20 million after tax (paragraph 32).

Conclusions

34. The privatisation of the National Bus Company took place during a period of considerable uncertainty in the bus industry. Nevertheless the approach adopted by the Department and the Company secured the disposal of its subsidiaries as independent going concerns well within the three year time limit for the sale. Arrangements made to assist employee groups prepare bids for their companies and the agreed pricing preference for employees gave that group a reasonable opportunity of acquiring a controlling interest in the organisation for which they worked.

35. Both the Department and the Company took professional advice throughout the sale. Total assets, valued at the end of 1985 at 8267 million, were sold for f324 million ie, a surplus of some E57 million. After taking account of the costs of sale, of tax liabilities, the repayment of loans and other expenses and of the surplus on the pension funds, the Exchequer will receive some f165 million. Overall the Department believe that the sale represented a very creditable achievement. The Department consequently believe that their approach to the sale thus secured a successful privatisation. The National Audit Office note that the evidence from Table 1 shows that the early subsidiaries were sold proportionately cheaper than the later ones. Uncertain market conditions at the start of the disposal programme were relevant here.

12 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

Appendix 1

Sale of the National Bus Company

Advertisements for the Sale of the National Bus Company

Annex 1: The original advertisement announcing the sale of the National Bus Company issued in March 1986.

Amex 2: “70 great names for sale” - the second advertisement issued in September 1966 at the time the first sales were getting under way.

Annex 3: The third advertisement issued in October 1986 aimed at the marketing industry.

13 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

Annex 1 of Appendix 1 THIS ADVERTISEMENT DOES NOT AND IS NOT INTENDED TO FORM THE BASIS OF ANY OFFER OF THE SHARE CAPITAL OF, OR THE UNDERTAKING OR ASSETS OF, THE NATIONAL BUS COMPANY OR OF ANY OF ITS SUBSIDIARY OR ASSOCIATED COMPANIES.

NATIONAL BUS COMPANY Pursuant to the provisions of the Transport Act 1985 the National Bus Company has a statutory obligation to dispose of the whole of its undertaking. Any person or company interested in acquiring any of the following undertakings should contact The Chairman, National Bus Corn an 172 Buckingham Palace Road London ii Wl b9TN

14 DEPARTMENTOFTRANSPORT: SALEOFTHENATIONALBUSCOMPANY

Annex 2 of Appendix 1 SEVENTY GREAT NAMES

15 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

Annex 3 of Appendix 1 ABUS COMPNY IS WORTH LOOKING AT FROM ALL SIDES

16 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

Appendix 2

The National Bus Company: Estimated net receipts from the sale

Em Em Proceeds of sale 324.2

Adjusted book value of subsidiaries at 31 December 1985 145.8

Increase in share capital 32.1

Assets acquired since 1085 31.6

Net indebtedness of subsidiaries at the time of sale 112.5

322.0

Deduct: release from re-valuation reserve 55.0

Book value of assets sold (267.0)

Expenses of privatisation (6.2)

Surplus on sale of assets (before tax] 51.0

Capital Gains Tax (11.8)

Surplus on sale of assets (after tax) 39.2

Estimated surplus on winding up of Company (after servicing Government debt [E31 million]] 6.2

Estimated surplus from Pension Funds (E200 million gross less E80 million tax] 120.0

Estimated net receipts from the sale 165.4

1. Proceeds of sale include internal transactions between subsidiaries and the holding company of some E60 million.

2. The above summary is drawn from the National Bus Company Annual Report and Accounts for the year 1989-90 which were presented to Parliament on 13 November 1990.

17 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

Appendix 3

Sale of the National Bus Company

Description of seven operating subsidiaries

1. This Appendix contains illustrative information about seven operating subsidiaries sold at different times during the sale. This information, taken from a geographical spread of subsidiaries, illustrates the different sizes, characteristics and circumstances of each sale but is not intended to be a representative sample.

2. The seven subsidiaries are: The City of Oxford Motor Services Limited Limited Motor Services Limited Eastern National Omnibus Company Limited London Country Bus (North East] Limited Midland Red (West) Limited Company Limited

3. Annex 1 gives the broad location of the subsidiaries and some general operational information. Annex 2 provides comparative information about the subsidiaries such as the diversity in turnover, number of employees, size of bus fleets and the composition of fixed assets.

4. Annex 3 provides details of individual sales drawn from the submissions made to the Secretary of State by the Company and the Department’s advisers at the time final bids were being considered for approval.

18 DEPARTMENTOF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

Annex 1 of Appendix 3

Location of seven subsidiaries of the National Bus Company

City of Oxford Management buyout. Buses serving Oxford and Sold to Stagecoach Ltd. immediate surrounding Main operator of local bus area. services in West and North Cumbria when sold. Coach ex ress services mark& 2 under Oxford City Link livery.

and southern Merseyside Local bus services centred when sold. in and extending to Y I _ ^^.. -I:^^

South Wales Transport Management buyout. Local bus operations serving West Glamorgan and Dyfed, inter-urban services and coach work.

\ andon Country [North East) Sold to Parkdale Holdings Midland Red West !5?tgEzo:!g:sm Management Buyout. operations). Operator of local bus Operator of local bus services in the West services mainly in and coach Hertfordshire and North services. Essex. Small fleet of coaches also run.

19 DEPARTMENTOF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

Annex 2 of Appendix 3

The information in this annex shows the diversity in turnover, number of employees, size of bus fleets and composition of fixed assets of each subsidiary

(i) Annual turnover

Tumoverfm

City of Oxford Crosville Cumberland Eastern Nat. London C.NE Mid. Red(W) South Wales

(ii) Number of employees

Number

City of Oxford Crosville Cumberland Eastern Nat. London C.NE Mid. Red(W) South Wales DEPARTMENTOF TRANSPORZ SALE OF THE NATIONAL BUS COMPANY

Annex 2 of Appendix 3 (contd)

(iii) Size and nature of fleet

no of vehicles 525 1 I 450

315

300

225

150

15 n ” City of Oxford Crosville Cumberland Eastern Nat. LondonC.NE Mid. Red(W) South Wales

- Double Decker Single Decker Coach 0 Minibus

(iv) Composition of fixed assets

100 90 80 70 60 50 40 30 20 10 0 City of Oxford Crosville Cumberland Eastern Nat. London C.NE Mid. Red(W) South Wales

Property 0 Vehicles I Plant & Equipment

Source of information: Submissions to the Secretary of State, Memoranda of subsidiaries.

21 DEPARTb5* OF TRANSPORT: SALEOFTHENATIONALB"SCOMPANY

Annex 3 of Appendix 3

Summary of seven National Bus Company sales

1. The City of Oxford Motor Services Ltd.

Purchaser Management buyout Date of sale January 1987 Net proceeds f2.6 million Net book value of assets SO.8million Price/earnings ratio 6.5 Break-up value (deficit) iF(0.3)million

Background - a mid term sale of a highly profitable medium sized subsidiary.

Marketing and bids - the marketing strategy successfully attracted expressions of interest from nine parties which resulted in three bids. Price Waterhouse considered that this interest was instrumental in encouraging the management team during negotiations to increase their bid substantially to S2.6 million.

Property - two properties accounted for the majority of the property value included in the sale and the Company considered that both were necessary for the viability of the ongoing operations. The first at Cowley Road, Oxford had a potential alternative use value in excess of book value of some E3.65 million. The Company considered that it would be difficult for this value to be realised without spending an almost equal sum relocating within Oxford but nevertheless decided that a mortgage charge would be the most appropriate method for securing the public interest in this property. The second property was included in the sale at full market value.

Adequacy of offer - evaluation of the highest bid showed a premium on the net book value of assets of 225 per cent. The price/earnings ratio of 6.5 was considered by Price Waterhouse to be relatively low. But they noted that the estimated profit had not been reduced to take account of the probable effect of deregulation and future competition and considered that much of the profitable growth potential in the company had already been exploited.

Taxation - Price Waterhouse stated that there would be no tax leakage on the disposal of the company.

Employee participation - the new management undertook to offer up to 20 per cent of the equity to employees.

Competition - Price Waterhouse considered that the sale to management should assist in the promotion of competition.

22 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

2. Crosville Motor Services Ltd

Purchaser ATL (Western) Ltd Date of sale March 1988 Net proceeds f6.8 million Net book value of assets X4.3 million Price/earnings ratio N/A Break-up value [deficit) fQ.6Jmillion

Background ~ a late sale of a large and unprofitable subsidiary formed from the old Crosville company when it was divided up on the direction of the Secretary of State for Transport in 1986. The territory in which the subsidiary operated, although attractive to bus operations, was subject to considerable competition from passenger transport companies and municipal operators.

Marketing and bids - the marketing strategy resulted in the receipt of five bids including an unsuccessftd one from the management. Bids were invited on the basis that no mortgage charges would be imposed on property and therefore reflected any excess alternative use value.

Property - prior to the sale, one property was transferred to the National Bus Properties Ltd for separate disposal. Included in the offer for sale were 14 properties, three of which were leasehold. These had a potential alternative use value that exceeded net book value by El.62 million. Of this sum, El.3 million was accounted for by the depots at Birkenhead, Crewe and Runcorn. It was noted that, with planning permission, the Crewe depot might realise a further El.75 million, offset by relocation costs of some ~1 million.

Adequacy of offer - in assessing the adequacy of the best offer, the Company had regard to the current loss position and calculated that the offer provided a premium over the net book value of assets of 56 per cent (3 per cent if the maximum value for Crewe depot with planning permission was used) and exceeded the break-up value by some E9.5 million.

Taxation - Price Waterhouse considered that there was no tax leakage on the disposal.

Employee - ATL (Western] Ltd stated that in addition to introducing profit sharing for senior and middle management, it intended to formulate a profit sharing scheme for other employees within a few months.

Competition - Price Waterhouse considered that although ATL owned several other bus operators, they were not of a size to raise any competition issues. They believed the sale would assist in the promotion of competition.

Other matters - in the course of evaluating the offer, the Department’s advisers considered the possible benefits of delaying the sale. They advised that any enhancement of proceeds arising from a delay were subject to significant uncertainty within the timescale of the disposal programme and the sale should therefore proceed.

23 DEPARTMENT OF TRANSPORT: SALEOF THEN‘4Tl0NAL BUS COMPANY

3. Cumberland Motor Services Ltd

Purchaser Stagecoach Ltd Date of sale July 1987 Net proceeds (includes g433,OOOin the respect of surplus tax losses) 53.3 million Net book value of assets El.4 million Price/earnings ratio 16.9 Break-up value (deficit) f(2.3)million

Background - a mid-term sale of a profitable medium sized subsidiary. In 1986 bus depots and operations at and Penrith were transferred to Cumberland as part of the restructuring of Ltd.

Marketing and bids - the marketing strategy was successful in producing three indicative bids and two final bids, including an unsuccessful one from a management team.

Property - a number of properties were included in the offer for sale, all were considered to be operational and none had a potential alternative use value that significantly exceeded book value.

Adequacy of offer - evaluation of the highest bid showed a premium on the net book value of assets of 100 per cent and a forecast price/earnings ratio of 16.9 reflecting the forecast reduction in profitability resulting from the loss of subsidy and the impact of competition. The bid included a sum of s433,OOOin respect of surplus tax losses. While not affecting net Exchequer receipts this sum enhanced the sale proceeds.

Taxation - Price Waterhouse considered that there would be no tax leakage.

Employee participation - although pressed by the Company, Stagecoach had no plans to offer employees either a share scheme 01‘a profit sharing scheme.

Competition - although Stagecoach operated bus services in other areas, none was in an adjoining area. Price Waterhouse therefore considered that the sale would assist in the promotion of competition.

24 DEPARTMENTOF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

4. Eastern National Omnibus Company Ltd

Purchaser Management buyout Date of sale December 1986 Net proceeds s5.2 million Net book value of assets E7.6 million Price/earnings ratio 9.4 Break-up value (deficit] zZ(0.9)million

Background - an early sale of a large and profitable subsidiary. The associated engineering subsidiary was sold separately.

Marketing and bids - the marketing strategy attracted interest from four outside parties which were pursued by the Company’s advisers. However, none of those who had initially expressed interest proceeded to make an offer and only the management team bid was received.

Property - properties surplus to the operational needs of the subsidiary, together with the depot at London Road, Southend, were txmsferred to National Bus Properties Ltd or retained by the National Bus Company prior to the sale. The offer for sale included 21 properties which were all considered necessary for the viability of operations. The potential alternative use values of 11 of these properties exceeded their book values by some E3 million, EZ million of which was accounted for by three properties in Brentwood, Chelmsford and Colchester. The Company considered that the difficulty of finding alternative sites and the costs of relocation would outweigh any profits arising from the disposal and decided not to impose mortgage charges. Richard Ellis advised the Department that the alternative use values were fair and that no alternative approaches to property were justified.

Adequacy of offer - evaluation of the bid produced a projected price/earnings ratio of 3.9 for 1986 and 9.4 for 1987: the latter was considered by Price Waterhouse to result from an expected reduction in revenue due to competition from a large number of potential competitors as a result of deregulation. Although the bid represented a significant discount on net assets, it was substantially in excess of the estimated break-up value. Price Waterhouse considered the bid to be reasonable in relation to the anticipated future earnings of the business.

Taxation - Price Waterhouse considered that there was no tax leakage on the disposal.

Employee - although employees did not participate in the initial buy-out, management were considering the introduction of an employee equity scheme.

Competition - Price Waterhouse considered that the sale to the management would assist in the promotion of competition.

25 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

5. London Country (North East) Ltd

Purchaser Parkdale Holdings &Mr Stephenson Date of sale March 1988 Net proceeds E3.6 million Net book value of assets E3.4 million Price/earnings ratio N/A Break-up value 63.0 million

Background - a late sale of an unprofitable medium sized subsidiary, being one of four operators formed from the old London Country company when it was broken up on the direction of the Secretary of State for Transport in 1986.

Marketing and bids - because there were a number of properties with potential alternative use values significantly in excess of book value, additional marketing was undertaken and bids were invited in three forms: for the property alone, subject to leases in favour of the operating subsidiary; for the bus operations alone; for the property and bus operations combined.

Nine bids were received in various forms. None of these was for the bus operations alone even though the Company had invited negative bids. As the disposal of the property alone would have resulted in the break-up of the subsidiary and reduced both proceeds and competition it was decided that the five combined bids should be considered.

Property - included in the offer for sale were six freehold bus depots located in Grays, Harlow, Hatfield, Hertford, St Albans and Stevenage, and four leasehold properties. The alternative use value of these assets was estimated to exceed their current use value by some ~2.1 million.

Adequacy of offer - the final offer effectively comprised a premium bid for the freehold properties above the estimated alternative use value. and a negative bid for the bus operations. The Company considered that this final offer represented an overall premium of six per cent over the net book value of the assets and was a good price in the light of the past results and projected losses.

Taxation - Price Waterhouse considered that the sale resulted in a potential tax leakage of some X525,000. However, they considered that in view of the company’s trading position it was unlikely that this could have been utilised in the then near future, if at all.

Employee participation - subject to the company returning to profit the purchasers would introduce a profit sharing arrangement and might invite employees to participate in the equity of the company.

Competition - Price Waterhouse considered that, although Mr Stephenson held a significant interest in two other bus operators in Yorkshire they could not, in view of their location, conflict with the Company’s duty to promote competition.

Other matters - the successful bidder found, upon detailed investigation, that a number of the properties marketed as freehold had defective titles. Furthermore

26 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

the subsidiary was continuing to make significant losses, although the Company had indicated that these were under control and that bids should be made on that understanding. As a result the Company were forced to w-open negotiations with the successful bidder, accept a reduction in the value offered for the property and agree to bear the losses between the original strike date in June 1987 and the revised date in February 1988. The subsidiary was subsequently sold for a sum which represented srxne 40 per cent of the original offer (although still a six per cent premium over net book value). In deciding upon this cause of action the Company considered the alternatives of remarketing the company, delaying its sale and breaking it up but rejected them as unlikely to produce additional net proceeds. Price Waterhouse concurred with that view.

i DEPARTMENT OF TRANSPORT: SALE OF THE NATTONAL BUS COMPANY

6. Midland Red (West) Ltd

Purchaser Management buyout Date of sale December 1986 Net proceeds fX.9 million Net book value of assets E4.9 million Price/earnings ratio N/A Break-up value (deficit) f(0.3)million

Background - this sale, early in the disposal programme, was made up of two unprofitable National Bus Company subsidiaries: Midland Red West and Midland Red Coaches, medium sized and small respectively. The decision to proceed with a combined sale was taken because Midland Red Coaches was in serious financial and managerial difficulties and in danger of collapse.

Marketing and bids - the marketing strategy produced no specific enquiries and the management team offer was the only one received. It was increased slightly in the course of negotiations.

Property - three properties were transferred, prior to sale, to other subsidiaries where it was felt they would command a better price. Two properties retained by the new company had potential alternative use values E140,OOOand zQ80,OOO greater than their existing use values. However it was considered that, since re-location costs would significantly reduce any potential gains, no mortgage charges should be imposed.

Adequacy of offer - the offer was compared with the combined net asset and break-up values of the two companies. This showed a discount on net assets of some 61 per cent but a surplus over the estimated break up value. It was recognised that this method was not wholly satisfactory in view of the differing financial states of the two companies being sold. However, as the offer was not apportioned between the two companies it was not possible to evaluate items individually. As a substantial loss was forecast for 1986 no price/earnings ratio was available. However, based on an estimated profit for 1987 the price/earnings ratio would have been 7:l. Price Waterhouse considered that a significantly higher price could not be achieved.

Taxation - Price Waterhouse considered that the sale gave rise to a potential tax leakage of some cl.3 million. However, in view of the uncertainty surrounding the business’ future, they considered it unlikely that full leakage would occur for some years, if at all.

Employee participation - management gave an undertaking that up to 50 per cent of the equity would be offered to employees.

Competition - Price Waterhouse considered that the sale of two companies to one purchaser would not inhibit the promotion of competition because they were providing different types of service and that the sale to management would assist in the promotion of competition.

28 lJEPARnv5NT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY

7. South Wales Transport Company Ltd

Purchaser Management buyout Date of sale May 1987 Net proceeds E3.0 million Net book value of assets f4.0 million Price/earnings ratio 14.1 Break-up value (deficit) ~(1.2)million

Background - a mid-term sale of a medium sized profit making subsidiary.

Marketing and bids - the marketing strategy resulted in four outside parties and the management expressing interest. Two bids were received, one from the management and one from a group primarily involved in property development. The negotiators tried, unsuccessfully, to get the two parties to co-operate.

However, both bids were more than doubled during negotiations. The ruling on offers relating to employee/management bids, that they should be accepted when within five per cent of the highest offer, was applied.

Property - the offer for sale included four properties where the potential alternative use values exceeded book values, but only in the case of the Quadrant bus station in was there a significant difference of some S926,OOO.In view of the potential alternative use value of the Quadrant bus station the Company considered the alternatives of a separate sale, securing an interest in any future gains by way of a mortgage charge 01‘a sale with the mortgage charge bought out. The latter course was chosen as it realised an immediate additional cash benefit of ~!%00,000whereas the other methods offered no certainty of increased benefits. In the case of the other properties the Company did not consider that mortgage charges were justified because relocation costs could offset any profit from sales.

Adequacy of offer - although the successful bid was evaluated by the Company as giving a favourable price/earnings ratio of 14.1 it produced a discount of 25 per cent when compared with the net book value of assets. Price Waterhouse considered that the principal reason for the discount was that El.9 million had been spent on vehicles and refurbishment of properties during the last two years and that this investment was unlikely to generate sufficient return to support itself. Price Waterhouse considered that the offer was good in relation to past earnings and the likely earnings for 19%‘.

Taxation - Price Waterhouse advised that the sale would not give rise to any tax leakage.

Employee participation - the management intended to provide for employee participation in profits by way of a share option scheme.

Competition - Price Waterhouse considered that the sale to management should assist in the promotion of competition.

29