Report by the Comptroller and Auditor General NATIONAL, AUDIT GICE Department of Trade and Industry: Sale of Rover Group plc to British Aerospace plc Ordered by the House of Commons to be printed 21 November 1989 Her Majesty’s Stationery Office, London E4.60 net DEPARTMENT OF TRADE AND INDUSTRY: SALE OF ROVER GROUP PLC TO BRITISH AEROSPACE PLC 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 Comptroller and Auditor General National Audit Office 20 November 1989 TheComptroller and Auditor General is thehead of theNational 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 TRADE AND INDUSTRY: SALE OF ROVER GROUP PLC TO BRITISH AEROSPACE PLC Contents Pages Summary and conclusions 1 Part 1: Background and Scope of NAO Examination 5 Part 2: Negotiating Arrangements 7 Part 3: Financial Terms of the Sale 8 Part 4: The Price Paid 10 Part 5: Achievement of the Government’s Objectives 13 Appendices 1. Financial terms proposed throughout negotiations 15 2. Executive Summary on Report by Touche Ross & Co. to the NAO on the sale of Rover Group plc - the valuation of tax losses and capital allowances 16 3. Report from G L Hearn and Partners on the value of Rover Group’s surplus sites 18 DEPARTMENT OF TRADE AND INDUSTRY: SALE OF ROVER GROUP PLC TO BRITISH AEROSPACE PLC Summary and conclusions Background 1. On 1 March 1988, the Secretary of State for Trade and Industry announced that the Government had entered into exclusive negotiations with British Aerospace plc to sell them the Government’s majority shareholding in Rover Group plc. The sale was completed on 12 August 1986 for ~6150million, after the Government had made a cash injection of f547 million into Rover Group. 2. This Report records the results of an examination by the National Audit Office (NAO) of the factors influencing the Government’s decision to deal exclusively with British Aerospace, of the arrangements for the sale, of their financial implications, and of the achievement of the Government’s objectives for the sale. Findings 3. The main findings and conclusions arising from the NAO’s examination were: On the granting of exclusive negotiating rights to British Aerospace 4. (a) The Government’s decision to grant exclusive negotiating rights to British Aerospace up to the end of April 1986 was based on the view that the benefits of competition were outweighed by the risk to Rover Group’s prospects arising from the uncertainty that would be associated with a competitive sale. A failure of Rover Group could crystallise the Government’s obligations to the Company’s creditors under assurances given to Parliament. Ministers had been fully informed of the advantages and disadvantages of dealing exclusively with British Aerospace. They were also aware of the advice given by Baring Brothers and Co Ltd, the Department’s financial advisers on the sale, that it was essential to create a competitive market if confidence was to be achieved that the best terms available were obtained. Barings however recognised the Government’s right to decide to give weight to broader considerations (paragraphs 2.3-2.6). On the negotiation of the financial terms of the sale 5. (a) The announcement of the Government’s intention to negotiate exclusively with British Aerospace for two months for the sale of Rover Group prompted approaches from four other companies. The Department of Trade and Industry told them that, if negotiations with British Aerospace did not lead to an agreement, alternative proposals would be considered. In the event the four expressions of interest were not translated into firm offers [paragraph 3.5). (b) The Department’s initial expectation was that, after a cash injection to wipe out financial debt, the net cost to the taxpayer of selling Rover Group might be E500 million. But, following submission of the terms to the European Commission, the balance 1 DEPARTMENT OF TRADE AND INDUSTRY: SALE OF ROVER GROUP PLC TO BRITISH AEROSPACE PLC between cash injection and consideration was reduced to E422 million, including the cost of easing tax restrictions [paragraphs 3.3 and 3.11). On the price paid 6. [a) It is difficult, in the absence of competition, to determine a fair price for a Rover Group substantially relieved of debt. The Department pointed out that the consideration of El50 million was the most that British Aerospace were prepared to pay (paragraph 4.19). (b) However, it should be recognised that, for El50 million, British Aerospace obtained: - a going concern whose profit for 1987 was E27.9 million which, on the basis of the price/earnings ratio of 5: 1 cited by the Secretary of State, suggests a minimum value of some El40 million (paragraphs 4.5-4.6); - tax benefits worth between E33 million and E40 million, available to reduce the business’s future tax liabilities (paragraph 4.9); - surplus sites, not required for the running of the business, subsequently estimated by the NAO’s advisors as worth f33.5 million at the time of the sale (paragraph 4.12); and - holdings in nine associated companies, some of which they could sell without detriment to the rest of the business, and from which in two cases they have already raised El26 million, significantly more than the f48 million to f60 million foreseen at the time of the sale (paragraphs 4.14-4.17). (c) In the circumstances the question arises as to whether, in negotiation, the Department could have argued for a price higher than f 150 million. Or, at least, have sought in negotiation clawback provisions to enable the taxpayer to share the benefits arising from the sale of surplus land and associated company holdings: and the utilisation of tax losses, (d) While accepting the problems in second-guessing the results of negotiationswith hindsight,the fact remainsthat the Department’s negotiating resulted in British Aerospace paying f150 million for a business which made a profit before interest and tax of E65 million in 1988 (paragraph 4.7); and which also had surplus assets and other benefits worth at least ~250 million, of which it has so far realised f126 million (paragraphs 4.9, 4.12, 4.15, 4.17). The NAO believe that these figures suggest that the Department could have raised in their negotiations the scope for clawback provisions to enable the taxpayer to share in these significant benefits without prejudice to the Government’s objectives for this sale (paragraph 1.8). However, the Department were convinced that this could not have been achieved without cost. They argued that the deal was structured on the basis of British Aerospace assuming the risks as well as the opportunities: if the latter had been curtailed through clawback, it would have fundamentally altered the balance of the terms. 2 DEPARTMENT OF TRADE AND INDUSTRY: SALE OF ROVER GROUP PLC TO BRITISH AEROSPACE PLC On the achievement of the Government’s objectives for the sale 7. The NAO concluded that the Department had substantially met three of the four objectives set by the Government for the sale of Rover Group, ie: (a) To privatise Rover Group within the lifetime of the current Parliament. This objective was successfully fulfilled [paragraph 5.2). (b) To relieve the taxpayer of potential liabilities on the best possible terms. Successive Secretaries of State had given assurances in Parliament that Rover Group would not be left in a position where they could not meet their obligations to creditors. British Aerospace have provided an indemnity against any such reasonably foreseeable claims. However, since the sale price was well below the NAO’s valuation of the company at the time of the sale, the NAO questioned the Department’s assertion that no better terms could have been secured (paragraphs 5.3-5.8). (c) To achieve a clean break without further risk to the taxpayer. This objective has been met as far as is practicable. For example, there remain certain monitoring obligations imposed on the Department by the European Commission (paragraphs 5.7-5.11). (d) To avoid damage to Rover Group through privatisation. The Company’s declared results show that it has been trading profitably since privatisation; indeed profits were substantially higher than forecast in the 1988 Corporate Plan. The Company’s 1988 sales were 10 per cent higher than in 1987, although UK market share was not increased (paragraph 5.12). General 8. The NAO recognise that many considerations, other than the purely conclusions financial, may come into play when the Government decides to sell state-owned enterprises. And it is not for the NAO to question the policy objectives set in such cases or generally. However two particular issues have arisen from their examination of the Rover Group sale which the NAO recommend should be considered in future sales of Government-owned undertakings. 9. First, it is important, whatever negotiating arrangements are made, for the Government to establish as realistic a valuation as possible of the undertaking to be sold. The NAO acknowledge that the particular circumstances or history of an undertaking may make this difficult but believe that awareness of this figure would enable the Government to set the price against their assessment of the value of nun-financial benefits. The Department told the NAO that, in the circumstances of the sale of Rover Group to British Aerospace, they were convinced that the consideration represented a realistic value which could not have been improved upon.