§ Mr. Geoffrey Lofthouse (Pontefract and Castleford)I wish to speak on the unwelcome bid by Hoylake Investments for BAT Industries. Before I begin, let me stress that I have no vested interest in either BAT Industries or the Transport and General Workers Union, of which I am not a member and to which I shall probably refer.
At £13 billion, this is the biggest takeover bid ever seen in this country—and among the biggest anywhere in the world. Outside the utilities and the oil industry, BAT is Britain's largest industrial company. Many of my constituents and those of many other hon. Members are employed by it. It contributes much to our local economies. British companies in the group include Argos, Wiggins Teape, Eagle Star, Allied Dunbar and British American Tobacco. It is acknowledged to be a world-class business with a leadership position in many key markets. Worldwide it employs more than 300,000 people in 19 countries; in the United Kingdom it employs 32,000 in about 250 constituencies. BAT has invested £668 million in fixed assets in the United Kingdom over the past eight years.
I believe that Hoylake is a consortium specially formed for the purpose of taking over BAT Industries. It consists of Sir James Goldsmith, Jacob Rothschild and Kerry Packer—the Australian gentleman in the stocking mask. There are some minor players as well, including GEC, Agnelli and some foreign banks intended to provide credibility.
Goldsmith is known for many aspects of his life. Among his sayings is, "Takeovers may be interpreted by some corporate raiders as being for the public good, but that is not why I do it. I do it to make money."
The idea is that instead of offering £13 billion in cash, which it does not have, the company should borrow more than £12 billion, pay off the loan by selling components of the company and then be left with the tobacco company for nothing. That would be highly damaging to the strength and success of such companies as Argos, the catalogue retailer, which operates in my constituency.
At the end of last year Argos had more than 220 stores nationwide. It is one of the biggest employers in the retail sector, with about 10,000 employees. It has in Castleford a distribution centre which was opened in 1984 with an initial work force of 52. In June this year, its work force on the site was 270 permanent staff and it provides temporary employment for a further 200 people at seasonal peaks.
The total investment by Argos in its Castleford distribution centre is £9.4 million. It plans to continue its investment, not only in that region but in the north in general and has plans to extend the number of Argos outlets to more than 600. The House will see that we are hopeful about the further increase in the number of jobs that Argos will provide in hard-hit areas, such as my constituency, with limited employment opportunities.
The House will be aware that I have frequently spoken about the problems that my constituents face as a result of the rundown of the mining industry. We have suffered severely and are still suffering, and it appears from the intention of British Coal to reduce in this financial year the 1392 number employed in the industry by 20,000 men, that those problems will continue. My constituency cannot afford to lose any more jobs.
Castleford may not be the first place that hon. Members would think of for a model of the fictional Gotham city, but we share with that city the belief that BATman has been good for us. We do not want any jokers or penguins to come along and spoil it. That would happen if the bid is allowed to go through, because many specific benefits result from BAT's ownership of Argos. It has access to expertise and technologies within the BAT group in areas such as information systems and training development. With BAT Industries behind it, Argos was able more easily to buy leases in places where it was not regarded as a prime tenant. That credibility gives a certain access to high-profile brands. Argos's ownership removes cash restraints enabling more rapid expansion and reinvestment than could be achieved independently or under new ownership concerned with paying back the purchase price before reinvesting. Under BAT Industries, Argos can continue to engage in long-term planning rather than having to concentrate on short-term gains.
As well as its contribution to Castleford, Argos brings much to the national economy in four main areas—jobs, investment, orders and shopping. The number of people employed by Argos alone averages 10,000 and rises to 16,500 to cope with seasonal demands. It is planning a £200 million expansion programme to treble its number of outlets and in 1989 it spent £25 million on shop fitting. It also plays a part in developing retail technology. Most goods are bought from British firms or United Kingdom subsidiaries of overseas firms. Approximately 40 per cent. of goods sold by it are made in the United Kingdom, allowing suppliers to invest in new technology, capacity and personnel.
The expansion of Argos is helped by its being part of BAT Industries and that has increased consumer choice for 45 million customers and increased retail competition. Significant investment in quality control and production safety ensures the supply of safe products.
I have put the Argos case as I know it and as I have had it explained to me. The Hoylake bid is bad because it is uncertain that a future owner of Argos would sustain the company's excellent progress and allow it to continue to generate record profits, expand and create even more jobs. The benefits gained from being part of BAT Industries would be lost, and there is no certainty that the new owners would provide the existing level of commitment to the growth of Argos. Highly leveraged bids put constranits on a company to produce short-term profits, often to the detriment of long-term growth. Without investment, it becomes harder for a company to compete in the market place or to develop new retail opportunities, which leads to reduced consumer choice and less retail competition.
I am no financier, but one does not have to be a big-shot financier to see that such backing and investment will not be available if the Hoylake bid succeeds. If it is successful, BAT will be financed not by shareholders' funds, but by what are called junk bonds. These are unsecured IOUs that offer much higher interest rates in return for accepting much higher risks. They were invented and developed in the United States, where investors were persuaded that the higher returns—often 3 or 4 per cent. higher—compensate for lack of security.
More than two thirds of the money raised in junk bonds was to be used to finance leveraged bonds. The term 1393 leverage refers to the debt level necessary for raising funds. The bonds were originally intended to allow managements to buy their companies from divesting owners, but the leverage technique is increasingly being used to allow predators to acquire huge corporate assets on borrowed money.
Such acquisitions depend on substituting debt for equity. The acquirers buy the organisation, using junk bond funding to pay off the original shareholders. The junk bond holders require their high level of interest, and the bonds are due to be repaid in full at the end of the agreed term. In this way, the company's gearing or ratio of debt to equity is raised significantly. Servicing the debt becomes the paramount corporate objective, to the exclusion of longer-term concerns. Investment, research and development, training, employment and capital expenditure—all are subordinated to the need to bring in as much cash as possible.
Time, talent and resources are devoted to the short-term aim of squeezing assets to the limit so as to produce enough profits to meet the high interest charges. If sufficient profits are not forthcoming, assets have to be sold to cover the payments. All notions of corporate responsibility and investment for the long term frequently disappear. Average gearing rates would rise from 15 per cent. to more than 50 per cent., making companies more vulnerable in an economic downturn.
The United Kingdom has so far escaped the effects of large-scale leveraged buy-outs. The Hoylake bid for BAT Industries, involving a 14:1 debt equity ratio is greater by a factor of 15 than anything seen before in Europe. If it is successful, it will lead to the breaking up of a major British company and old-fashioned asset stripping on a scale never seen before. It will be the sale of the century of major British businesses with considerable worldwide interests operating on a global scale.
BAT does a good job for us in the United States. It is one of the largest United Kingdom companies in America, having built a business over the past 60 years worth$7 billion—from a $50,000 investment and all from retained earnings. The work of six decades would be gone within months. The new owners of these businesses will have to borrow money to buy them, and then they, too, will need to service debts before they are able to invest in capital equipment, staff training and development and research and development. The bid has important implications also for British industry as a whole and for companies in every constituency. It could open the floodgate for similar bids in Britain on the same scale as that which has been experienced in America, where about 10 per cent. of the capital value of publicly owned quoted companies has disappeared. The so-called retirement of equity could lead to the early retirement of many British workers.
Research that has been conducted on the United Kingdom plc computer model of the stockbrokers Hoare Govett suggests that half of the top-ranking alpha securities on the London stock exchange could be threatened. It is forecast that 32 major British companies could be subject to a leveraged takeover by 1993.
I do not know what the implications of that would be for the economy. I do not know what would ensue if large firms were to disappear from the stock market as a result of being asset stripped, but I do know what it would mean 1394 for leading employers in my constituency. I can guess that it would be bound to have a serious consequence for London's position as a leading global stock market. There could be repercussions for pension funds and other investing institutions. Where are pension funds, including my union, going to invest their money if major blue-chip equities have gone to the financiers' knackers yard? If junk bonds are raised abroad, will the interest add still further to the balance of payments deficit? What will be the loss of remitted overseas earnings?
I do not know the answer to many of these questions. I suspect that many hon. Members pretend to know them but in reality do not have the foggiest idea either. I believe, however, that these matters are of fundamental importance to British business, to jobs and the economy as a whole.
Enough basic questions about the long-term effects on the capital structure of the corporate sector and the effect on growth and further jobs have been raised for us to commission a major inquiry of the Monopolies and Mergers Commission to allow us to determine what fears are justified.
I have mentioned the interest of the Transport and General Workers Union, which has set out its case to me by letter. It has supported the opposition to the bid. I shall quote two paragraphs from its letter of 19 July, which was sent to me by Mr. Peter Smith, a district secretary. He wrote:
The bidding group has openly announced that if the bid is successful they will dissect and asset strip all divisions other than tobacco, hence the fear and apprehension of the TGWU members involved (over 150 persons). It seems that the takeover bid will consider nothing other than the thirst to make a quick profit with scant regard for employees and their families.I would personally wish to point out that the TGWU has developed an excellent working relationship and has found the company neither remote nor insensitive to the desires and aspirations of their employees.That is a reference to Argos. The letter continues:Indeed, over a 3–4 year period, the Union has made real improvements both financially and socially in terms and conditions of employment.The Castleford Depot alone has in a relatively short period of time expanded and doubled the number of employees. Nationally the picture is reflected with new distribution centres at Welwyn Garden City and Bridgwater.With all that in mind, I urge right hon. and hon. Members on both sides of the House to support my request to the Government to refer the bid to the commission before it is too late. By the time that the House returns from the recess in the autumn, BATman may have gone and the joker could be moving in on the major employers in the constituencies of a number of right hon. and hon. Members. I ask the Minister to refer the bid to the Monopolies and Mergers Commission.
§ Mr. Neil Hamilton (Tatton)I congratulate my hon. Friend the Member for Wokingham (Mr. Redwood) who is to make his maiden ministerial speech in this debate. Among the prophets of modern free enterprise capitalism, my hon. Friend has an honoured role to play. I count him second only to our right hon. Friend the Prime Minister in this House, and only just behind Sir James Goldsmith, as the person who has most popularised the concept of free enterprise in its modern form, which has done so much to transform the British economy.
1395 I congratulate also the hon. Member for Pontefract and Castleford (Mr. Lofthouse) on his success in securing the debate, even at this hour. The hon. Gentleman spoke eloquently of his constituency interests and of his fears for the jobs of his constituents. I hope that I shall be able to reassure him.
I begin my speech, as did the hon. Member for Pontefract and Castleford, by declaring that I have no financial interest of any kind in any of the companies that are the subject of the bid or involved in making it. I stand to gain in no sense, except that we all stand to gain from companies being well run and the jobs of their employees being made more secure as a consequence. In that sense, the country as a whole benefits.
The hon. Member for Pontefract and Castleford is entitled to express his concern, but he speaks before the full facts are disclosed and analysed. Neither the offer document nor BAT's response has yet been published. Together, they should provide the detailed information on which we can all base our opinions. It is appropriate to wait until their publication in August before rushing to premature judgment. Otherwise, the debate will be based on popular emotion and bias rather than objective views.
The burden of the hon. Gentleman's remarks was the possibility that the demerger of a conglomerate such as BAT could create unemployment. I draw attention to the irony of the hon. Member for Pontefract and Castleford rushing to the defence of a multinational conglomerate based on tobacco products, when such a company normally occupies a secure place in the Labour party's chamber of horrors of international capitalism. Nevertheless, I gather that the hon. Gentleman considers that BAT is an exception to the rule.
It has not been suggested that transferring the ownership of BAT's various subsidiaries would result in any closures. Certainly that is not the intention of the prospective bidders. The facts disclosed in due course will prove or disprove the suggestion that companies within BAT are poorly run—which is the case made by Sir James Goldsmith and his partners.
BAT is a disparate group of companies engaged in totally unconnected activities, ranging from tobacco and insurance companies to department stores and papermaking. The essence of the bidder's case is that the companies are underperforming and that their performance would be greatly enhanced by restoring their independence or joining them with others that can offer the appropriate and different skills needed in each of the industries concerned.
The demerger is aimed at making the subsidiaries much more secure and at protecting the jobs of those who work in them. The companies' prosperity would be enhanced, so their productivity and number of employees would increase. There would be increased investment in research and capital equipment, leading to higher profitability. If the case is made for all that, the suggestion that jobs are in jeopardy would be proved false. The opposite would be the case. Hoylake is, in a sense, trying to privatise within the private sector.
The objective is to liberate those subsidiaries from the control of the conglomerate. If there is a demerger it will be possible for those who run the companies locally to participate in management buy-outs and for the employees to acquire a real share in the enterprises in which they work. One of the beneficent aspects of the Government's 1396 period of office is that we have made it possible, not only within the public sector but within the private sector, for the benefits of capitalism to trickle down in that way.
BAT is often described as being a major British industrial company. The hon. Member for Pontefract and Castleford made it clear that it is not a British industrial company in anything other than a very minor way. Its industrial activities in the United Kingdom account for only 9 per cent. of its assets and 8 per cent. of its profits. It is basically a holding company of foreign subsidiaries. Most of its industrial activities are overseas.
Therefore, the restructuring of BAT would result in a major return to this country of capital previously invested overseas which, when repaid to shareholders, would contribute to the continued industrial development of the United Kingdom. There is a great opportunity here for the repatriation of capital to Britain, something which I thought that the Labour party was in favour of.
It has been stated that the offer being made for BAT would result in the creation of an ongoing highly geared or heavily borrowed company, weighed down by debt to such a degree that it could render its future fragile.
The hon. Gentleman spoke with some feeling about the way in which the offer will be financed, saying that it would be financed by junk bonds. There is a significant difference between the proposal for financing this bid and junk bond-based bids. What is proposed here is not the issue of a bond to be financed out of future speculative profits, which is what a true junk bond is, but a bond which is to be financed by demergers and selling off the assets which are presently underperforming and so are undervalued.
The figures that are available for anybody to see in published reports show that if Hoylake succeeds in its bid it will not create a highly geared or heavily borrowed company. In fact, it will be a less highly geared or heavily borrowed company than BAT is at the moment. The debt that will be incurred will be repaid within a year from the proceeds of the announced disposal of those businesses that have nothing whatever to do with the traditional core business of BAT.
It can be seen from the reports available from City analysts that the resultant company would be classically financed, with substantial capital and a normal level of ongoing debt. Claims that a highly indebted and therefore endangered company would result from the transaction are false and seem designed to appeal to emotion rather than to reason.
Whatever the merits or demerits of the proposed offer for BAT, there can clearly be no element of restraint of competition. Therefore, there is no case for a reference to the Monopolies and Mergers Commission. That view seems to be shared by almost every commentator in all the quality newspapers with one exception.
§ Mr. LofthouseThe hon. Gentleman will be aware that only this week the CBI recommended that the bid should be referred to the Monopolies and Mergers Commission.
§ Mr. HamiltonThat may be a point in my favour in view of the CBI's history in recent years.
If the hon. Gentleman has been reading the Library's newspaper cuttings on the bid he will know that the overwhelming majority of financial and economic commentators have come to the conclusion that there is no case on the basis of competition, which is the basis of the Government's policy for references, for a reference to the 1397 Monopolies and Mergers Commission. Newspapers as diverse as the Financial Times, the Evening Standard and The Sunday Times have agreed that the bid is not an appropriate case for referral. I hope that my hon. Friend the Minister will agree with that.
My last point relates to the insurance companies that BAT owns, which are different from its industrial and trading companies because there is the question of trusteeship. It is natural, therefore, that some concerns should have been voiced in respect of those subsidiaries. The interests of the insurance companies' policyholders will be unaffected. The bidding company, Hoylake, is committed to dispose of the insurance companies, not to interfere in the management during the process of the disposal, not to increase the payments of dividends and to seek advice from the existing management in establishing the appropriate future for the companies. Hoylake has stated that it has no interest in maintaining a shareholding in the insurance companies and that there can, therefore, be no legitimate concerns about the interests of policyholders and other insurance clients.
The nub of the case for what Hoylake seeks to do is this: the shareholders of BAT should decide whether the offer should succeed or fail. That decision should not be made by Governments or by politicians such as the hon. Member for Pontefract and Castleford and myself, who have little locus standi in this matter. The basis of our free enterprise society is that is it shareholders, and not politicians or management, who have the right and responsibility to determine the basic issues affecting their company. I urge my hon. Friend the Minister to let the market be the test of the bid. In due course the shareholders will be able to judge between the case for Hoylake and the case for BAT and we can leave the future of the company and its employees safely in their hands.
§ 7.2 am
§ Mr. Gerald Howarth (Cannock and Burntwood)I join my hon. Friend the Member for Tatton (Mr. Hamilton) in congratulating my hon. Friend the Member for Wokingham (Mr. Redwood) on making his maiden outing today as the Parliamentary Under-Secretary of State for Corporate Affairs. I have an interest in the fact that he has been elevated so early in his life in this place because I have occasionally been mistaken for him. Perhaps I shall continue to bathe in the reflected glory of his meteoric advance.
I thank the hon. Member for Pontefract and Castleford (Mr. Lofthouse) for affording us the opportunity to debate this important matter. I understand the concerns that he has expressed on behalf of his constituents. I hope that we can reassure him that his constituents stand to gain, rather than lose, from the proposals on the table. I, too, find it amusing to see the hon. Gentleman leaping to the defence of an international conglomerate which has, as he said, invested heavily in the United States. Perhaps, after he has heard all the arguments he might join us; then we should see the repatriation of funds to the United Kingdom.
§ Mr. LofthouseMy main concern is jobs in my constituency.
§ Mr. HowarthI have never doubted the hon. Gentleman's purpose in bringing the matter before the House, and I am sure that his constituents will be very grateful.
A number of major British companies might look askance at the claims being made by BAT for its ranking in the league table. British Aerospace, which I know reasonably well, has an enormous number of employees—far more than BAT has in the United Kingdom.
I have no financial or constituency interest in the matter. My only interest is that I regard myself as a friend of Sir James Goldsmith, who has made a significant contribution to the industrial and commercial world.
My hon. Friend the Member for Tatton mentioned the acquisition by BAT last year of the Farmers insurance company in the United States. It was a hard-fought takeover battle, as they often are. During that struggle, Farmers attempted to establish that BAT was not fit and proper to own a United States insurance company. Much of that argument concerned the potential conflict of interest between selling tobacco on the one hand and providing health insurance on the other. In a number of states, the insurance commissioners decided that BAT was not fit and proper. Then, BAT added a very large sum to the price that it was offering for Farmers, and Farmers' management accepted the higher offer. Almost immediately, the insurance commissioners reversed their original verdict thereby demonstrating the ability of management, if it so desires, to convince insurance commissioners. That is important, because BAT is seeking to use the United States insurance commissioners as a means to thwart the offer by Hoylake.
This is how it works: in the United Kingdom, the Takeover Panel, which regulates all takeover offers, has set a timetable that governs all such transactions. That timetable determines that the maximum time normally available between the initial offer and the end of the offer is 60 days. If a method can be found to make it impossible for an offer to be completed within the 60 days, the offer will lapse and will not be renewable for 12 months. Therefore, shareholders would have been denied their right to vote.
It seems to many people that that is the purpose of BAT's strategy in using the United States insurance commissioners to delay their approval by more than 60 days. For their part, the United States insurance commissioners have a wholly legitimate responsibility to assess Hoylake, should Hoylake intend to own Farmers or to run it for an interim period. To satisfy the commissioners, Hoylake made it clear that it would form a special trusteeship which would hold the interests in Farmers.
The trustees, who would be leading figures from the insurance industry unconnected with Hoylake, would control Farmers. Their task would be to identify a buyer suitable to the United States regulatory authorities to be responsible for the management of the company during the interim and to distribute dividends no higher than the historic pattern established by Farmers as an independent company.
Despite those assurances, BAT's management has attempted to provoke the insurance commissioners to initiate a process that would take more than the 60 days permissible by the United Kingdom Takeover Panel. It is important that the BAT management should fight the matter on its merits and put it to the vote of the 1399 shareholders. It should not seek to use what many—certainly I—would regard as an underhand tactic simply to frustrate the due process established by Parliament in the United Kingdom to allow shareholders to reach their verdict. That is an unsavoury aspect of this takeover battle. I accept that all takeovers are a hard and cut-and-thrust business.
As I was leaving the House in the middle of the night, I saw a report on the news tapes that BAT has employed the services of a firm of private detectives called Kroll International. Presumably that has been done at the expense of BAT shareholders. Why have private detectives been employed? Are they to be sent round to bug Sir James Goldsmith, Mr. Packer or Mr. Rothschild? Will they put devices in their cars? That sounds like the sort of thing that my hon. Friend the Member for Torbay (Mr. Allason) might write about.
I understand that Kroll uses the consultancy services of a British journalist called Michael Gillard who works on The Observer and is responsible for the "City Slicker" column in Private Eye—which some of us have known rather more intimately.
In 1979, Mr. Gillard brought an action against Sir James Goldsmith, the chairman of Hoylake, who had described Mr. Gillard as a blackmailer. The case was held before a jury and, after a lengthy hearing of the events, the jury concluded that Sir James Goldsmith was justified in describing Mr. Gillard as a blackmailer. The jury's verdict was unanimous and the verdict was upheld on appeal to the Court of Appeal and to the House of Lords. The case was widely reported at the time and could not have escaped public attention. I am sure that all hon. Members today will be familiar with what happened.
§ Mr. LofthouseDoes the hon. Gentleman appreciate that while all this intrigue is going on among the high financiers, some people want nothing more than to earn an honest living and have a job to go to?
§ Mr. HowarthI am well aware of that. I am trying to point out to the hon. Gentleman that it is not Sir James Goldsmith and Hoylake who are employing private detectives. The top management of the company that the hon. Gentleman is trying to defend have employed that international firm of private detectives.
Last week another article appeared in the "City Slicker" column in connection with the Hoylake offer. It was distributed on behalf of BAT to the insurance commissioners to stimulate sufficient doubts in their minds to provoke a delay which might take longer than 60 days to resolve and which would thereby thwart the Hoylake hid and deny the shareholders their right to vote. One must ask oneself whether that is the proper action of a major British public company seeking to protect the national interest or whether it is designed to protect the position of the current senior management of the company.
It will be evident to most objective people that this is not a frivolous bid but one that many serious commentators view favourably. It is not an asset-stripping exercise, as the hon. Member for Pontefract and Castleford said, but a proposal to the shareholders of BAT for the better management of their assets and the improved performance of the company's constituent parts. That could be in the best interests of the company's employees and the hon. Gentleman's constituents as much as it will be for the benefit of the shareholders. It would be wrong to 1400 take any action to deny the shareholders the right to consider and vote on the proposal which, as has been said, is likely to be put to the shareholders early next month.
That is real company democracy. It is not employing private detectives to put bugging devices all over the place, to seek to poison the minds of the insurance commissioners in the United States and to engage in a ploy that is simply delaying tactics to deny shareholders here the right to consider the matter. As the Financial Times concluded on 18 January, on the evidence so far available, it should be left to the shareholders to decide.
§ Mr. John Garrett (Norwich, South)Like other hon. Members, I thank my hon. Friend the Member for Pontefract and Castleford (Mr. Lofthouse) for raising what could become a major issue of industrial policy. Like everybody else, I have no financial interest in BAT, and certainly not in Hoylake, although there is an Argos outlet in my constituency.
Of course, like every other speaker in the debate, I welcome the Minister's debut on this issue. It is a pity that he could not have opened to a larger house, but Opposition Members look forward to hearing the views of a prophet of the free enterprise economy. No doubt he can enlighten us on the latest thinking in the world of prophets on this important development in industrial policy.
This case is likely to run and run, if only because of the delays that are becoming apparent from activities in the United States state courts. It is likely to become a landmark case in takeover history. Not only is the proposed £13 billion bid by Hoylake for BAT Industries the largest takeover bid that we have seen in this country, but it has clearly important implications for takeover and merger and, in this case, demerger policy. Therefore, Opposition Members would welcome the Government's preliminary thoughts on the issue. We have heard the free enterprise argument for leaving the bid without the intervention of the Government.
As The Sunday Times quoted on 16 July, in an article headed "Takeover mania",
No British public company—no matter how large—is now safe from corporate raiders … we are in the grip of takeover mania.The size of this bid is not only a matter of public interest but marks the debut in this country of the highly leveraged buy-out, which was developed in the United States, with what most impartial observers would consider to be disastrous results. The Sunday Times article went on:America's quoted sector has been ravaged by leveraged buyouts in the past few years—something similar is now expected here.That is why this could be a landmark case. If it proceeds, the floodgates will be opened by similar takeover devices, probably financed from the United States where there is so much more experience of this kind of thing than there is here.After more than 1,300 leveraged buy-outs in the United States, thousands have lost their jobs, a few have made many millions of dollars and there has been no perceptible improvement in corporate performance or efficiency. A number of studies, including one from the Brookings Institute, which have gone into the consequences of such a development in takeovers in the United States, bear out that contention.
The leveraged buy-out, usually called junk-bond financing in the United States and mezzanine financing in 1401 this country—a term which I have only learnt to get my tongue around in the past few days—is really a process of financial manipulation. The process involves issuing bonds where the ratio of debt to security is very high—in other words, a very large loan is made against a rather small security. A leveraged buy-out almost invariably must be followed by a rapid break-up of the victim company, which is usually a diversified conglomerate, with a strong cash flow and undervalued assets. The predator stands to make exceptional gains from the exercise. It is anticipated that Hoylake could make £1 billion out of breaking up BAT. It has been calculated that some 44 of the FTSE 100 companies could be targets; especially vulnerable are those with strong brand names, the values of which could easily be realised in a dismemberment. I have a number of such firms in my constituency which I will not draw to Sir James Goldsmith's attention by mentioning. It is really just a sophisticated name for asset stripping and one can imagine the turmoil in some of our largest companies as a result. It is likely to stifle any rational planning and development in companies at risk.
§ Mr. Neil HamiltonI should like to draw a distinction between classical asset stripping and what is proposed for the BAT bid. Classically, asset stripping is when one breaks up the company and sells off the assets, so that the company no longer exists and the assets are dispersed elsewhere. In effect, what is proposed here is a series of demergers, so that the subsidiary companies remain in existence but are better run, more profitable and, therefore, the jobs are more secure.
§ Mr. GarrettI cannot accept the hon. Gentleman's definition, because there was plenty of classical asset stripping in the 1960s, when the companies were not entirely liquidated, but some kind of demerger activity of the kind proposed here was carried on. In the activities of Slater Walker, I believe that was more often the case. Asset stripping usually related to the realisation of real property assets, such as land and buildings. Therefore, it is fair to call this a modern version of asset stripping.
I do not know whether the hon. Member for Tatton (Mr. Hamilton) saw last night's television programme on the career of Mr. Milliken, who is a junk bond guru in the United States, but is now under some suspicion. The hon. Member for Tatton said that there was no suggestion of loss of jobs, but on that television programme a senior executive of Goodyear—which was Sir James Goldsmith's last venture into such an activity—reported that thousands of jobs were lost from that great American industrial company, and Goodyear was lumbered with interest payments of $1 million a day, which had significantly altered the capacity for development of its business.
The predators in such takeovers have no intrinsic interest in the victim company, other than to take a short-term profit from the disposal of its assets. They make no positive or creative contribution to the economy, as United States experience has shown. The arguments that such takeovers shake up sleepy management do not hold water. That is be generally true of takeovers. After all, the DTI's 1988 report on merger policy listed nine separate academic studies which suggested that takeovers generally actually diminish efficiency and profitability.
1402 In the main, the people who benefit from such an exercise are the lawyers, the bankers, brokers, accountants, public relations and advertising practices—and now, I hear, private detectives—who, and I quote The Observer of 16 July,
hover over the scene like vultures over a mediaeval battlefield.Minorco's bid for Consolidated Goldfields was a quarter the size of the Hoylake bid and generated £50 million in fees for such advisers.Sir James Goldsmith justified his bid by saying that BAT's companies were being stifled under the bureaucracy of a large conglomerate. He does not know whether they are being stifled or not, but the only companies likely to buy Eagle Star insurance group, Allied Dunbar, Farmers group, Argos, Wiggins Teape and other BAT subsidiaries are conglomerates. There will therefore be no diminution in bureacracy, if bureaucracy is the normal condition of a conglomerate.
There is no evidence that the bid will benefit the economy, BAT's 320,000 workers worldwide or its 32,000 workers in the United Kingdom. Indeed, in any unbundling of BAT, many thousands of workers throughout the country may find their jobs at risk, which was the prime concern of my hon. Friend the Member for Pontefract and Castleford.
Another worrying issue is the bid's effect on capital markets. It could lead to our corporate finance system being awash with poor-quality bonds. The issue is not whether the bonds in this takeover are of higher quality than the junk bonds that are customary in the United States, but the principle of establishing whether such a leveraged buy-out is acceptable. One can be sure that poorer-quality bonds will follow the ones that Sir James Goldsmith and Hoylake issue. Of the bid, the Financial Times said that it was
financed by unquoted IOUs from an off the shelf Bermuda-based shell company.The Governor of the Bank of England has expressed concern that the development of the leveraged buy-out here could result ina profusion of unsuccessful financial arrangements.The bid could introduce massive instability into the British corporate scene. Leverage of the corporate sector debt levels in relation to the capital base has risen steadily in the United States, mainly as a result of the leveraged buy-out boom, so that, at present debt levels, 10 per cent. of United States companies will be acutely vulnerable to a recession on the scale of that in the early 1980s.There is every sign that the BAT bid will pave the way for a flood of big leveraged deals in Britain, making our companies similarly vulnerable. The effect will be to encourage short-termism—to encourage managers to take a short-term view, cutting back on investment and research and development to deter predators, and, after takeovers, maximising cash flow to service excessive debt levels. Corporate planning in anticipation of 1992, for example, could be made extremely difficult.
In our view, the national interest should require that the onus of proof should be reversed in major takeover bids—a point that we made in Committee debates on the Companies Bill, and which we will continue to make when the Bill returns from the other place. The bid should be shown to be in the national interest before being allowed to proceed. The Tebbit doctrine of making the criteria for 1403 the takeover of companies relate only to competitiveness is not enough, and it is certainly inadequate in bids such as this.
Sir Gordon Borrie, the Director General of Fair Trading, said in December 1986 that takeovers should be required to show benefit to the economy and suggested that reversal of the burden of proof applied to takeovers of a certain size would be a way of tackling the problem of financial markets taking an excessively short-term view. He said:
The decision to buy or sell particular shares at a particular price does not necessarily bring about the most efficient deployment of and development of the assets which these shares represent.We agree with Sir Gordon Borrie and the Confederation of British Industry that the bid should be referred to the Monopolies and Mergers Commission, first, because of its size—the CBI says that one bid of this size could buy control of 25 per cent. of Britain's manufacturing exports—secondly, because of the creation of a massive amount of corporate debt and dubious instruments of finance and thirdly, because of the endangering of investment in plant and equipment and research and development in many of our large companies—the short-termism argument.There are many issues of public and corporate interest in this dangerous development, and in our view the Government should refer the bid to the Monopolies and Mergers Commission for mature and careful consideration. As I said, it could be a pacemaking event in corporate finance in this country. It has a number of extremely dangerous implications and it should be considered very carefully, first, by the Government and, secondly, by the Monopolies and Mergers Commission before being allowed to proceed.
§ The Parliamentary Under-Secretary of State for Corporate Affairs (Mr. John Redwood)We have had a good, wide-ranging debate. Although there may not have been many hon. Members present, what was lacking in quantity was certainly made up for in quality. I welcome my hon. Friend the Member for Derby, North (Mr. Knight) to his duties on the Front Bench and thank my two hon. Friends who spoke so kindly about me. I hope that all they said was meant to be praise and I take it in that spirit. I am grateful to the hon. Member for Norwich, South (Mr. Garrett) for his remarks.
The debate has prefigured many of the arguments that will be conducted by the participants in this matter over the next few weeks. I congratulate the hon. Member for Pontefract and Castleford (Mr. Lofthouse) on his success in obtaining this debate on the takeover proposal for it raises an important subject. How will our mergers policy deal with the phenomenon of leveraged or largely debt-financed takeovers? That was the prime concern of the hon. Member for Norwich, South and was mentioned by others. I hope to be able to reassure the House that both our mergers policy and legislation are equipped to deal with such takeovers.
The specific case of BAT is important as it is a large employer will plants and offices in many parts of the country. It is naturally apprehensive about possible change. The hon. Member for Pontefract and Castleford put his constituents' case well. drawing attention to the importance of Argos as an employer in his constituency.
1404 The bid by Hoylake Investments for the BAT group comes under the duty of the director general of Fair Trading. He advises the Secretary of State for Trade and Industry on whether particular mergers should be referred to the Monopolies and Mergers Commission. The director general is considering the proposed acquisition of BAT by Hoylake Investments and will consider any offer document that may emerge. There is no formal offer document that we know of yet. The Secretary of State will take his decision whether or not to refer this particular bid to the MMC in due course and in the light of the director general's advice.
I am sure that the hon. Gentleman will apreciate that it would not be right for me to comment in detail on this particular case, before the director general has advised the Secretary of State. I can assure the hon. Gentleman and the House that, as always, the director general and the Secretary of State will take into account all relevant aspects in the consideration of this proposed acquisition.
As the hon. Gentleman knows, the Fair Trading Act 1973 provides for a case-by-case scrutiny of mergers. Each merger or merger proposal which qualifies, because for example, the target company involved is larger than £30 million of assets or because the combined market share of the merged companies would exceed 25 per cent., is considered individually by the director general on its merits, in the light of all the circumstances at the time. Only if a merger is referred to the MMC, and the commission concludes that it would be against the public interest, does my right hon. Friend have powers to take action against that particular merger. Then my right hon. Friend can decide whether to block the bid or not.
I recognise that a particular concern in this case has been registered about the proposed financing of the Hoylake Investments' proposal—involving extensive borrowing. It has been widely reported that shareholders in the target company, BAT, will be offered not cash but various forms of loan notes, some of which are not secured and which are referred to as "subordinated debt", or to use the more pejorative United States phrase, "junk bonds". If such a bid were to succeed, it seems clear that the new company would have to service a large amount of debt.
But it is not at all clear that the financing of a takeover largely by debt—or "leveraging" as it is called—is likely to evoke a response from the market which diverges from the public interest more generally. One case in particular comes to mind where the financing of merger proposals was considered to raise public interest issues which deserved further investigation by the MMC. This was the Elders proposed takeover of Allied Lyons. In that case the MMC concluded in its report of September 1986 that the proposal would not operate against the public interest.
It found no evidence that the developments of the Allied Lyons businesses that Elders planned to retain would be prejudiced by financial stringency brought on by high capital gearing and low interest cover. The banks providing Elders' loan facility had expressed confidence in Elders' management, and on the basis of the available information, the commission did not think that Elders would make an imprudent future bid. In the event, Elders did not rebid.
There have, however, been other cases of leveraged bids where a reference has not been considered appropriate because the Secretary of State considered that the market was best placed to decide on the merits or otherwise of the proposal. Three cases that spring to mind are the 1405 Demerger Corporation's bid in 1986 for the Extel Corporation, Valuedale's bid later the same year for Simon Engineering and Barker Dobson's bid for Dee Corporation. In those cases, incidentally, the offers were unsuccessful in the market.
I shall, in this context, quote from the Department of Trade and Industry's blue paper on mergers policy of March last year. It states:
The consequences of highly-leveraged bids have been a source of concern to some commentators, primarily on the grounds that such bids are often mounted on the basis of plans to break up the target company if the bid is successful. In the typical highly-leveraged case, the bidder will usually need to to sell off parts of the company he has acquired in order to meet the debt obligations he has incurred in financing the bid. Some observers see such post-merger divestment as inherently destructive, and apply the pejorative label asset-stripping to it. On the other hand, others have pointed to the possible benefits of leveraging in subjecting the incumbent managements of even the largest company to the possible threat of takeover and to its associated healthy disciplines, from which they might in practice have been immune without the growth of leveraged financing techniques.Those two arguments have been mentioned today. The paper continued:The Government's view is one of scepticism as to whether there is normally a divergence between the interests of private decision-makers and the public interest where leverage bids are concerned. Some highly leveraged bids are rejected by shareholders: the market can and does make sensible judgments in rejecting bids where the risks of a high degree of leveraging seem too great. However, where there are profitable opportunities arising from leveraged takeovers followed by break up of the target company, the presumption must be that the profit arises from the assets concerned being put to more efficient and more profitable use than in the original target company, and that this is to the benefit of the economy as a whole. Therefore the Secretary of State will not normally regard high leveraging on its own as a ground for reference. However, he will continue to consider referring such bids when he believes that a high degree of leveraging, combined with other features of the bid, may pose dangers to the public interest.I have quoted from that document at length because it represents a good statement of the Government's position.That policy was reflected in the reference of the Goodman Fielder Wattie bid for Ranks Hovis McDougall, which was referred in August 1988 because of concern about the possible effects on competition, especially in the market for bread. In the event, Goodman Fielder Wattie withdrew its bid and the reference was laid aside.
Concerns have also been expressed about the possible implications of this bid for the insurance industry. Of course, I cannot comment on actions that may or may not take place in the United States. But there are implications in this country, as BAT has a significant financial services group comprising Eagle Star, Allied Dunbar and Farmers.
1406 I reassure the House that the legal position, under section 61 of the Insurance Companies Act 1982, is that anyone seeking to become a controller of an insurance company must give the Secretary of State for Trade and Industry prior notice of his intention to do so, and the Secretary of State will then consider whether he is a fit and proper person.
I should also emphasise that were this bid to be successful and were there to be any subsequent transactions resulting from it, each would be considered by the Director General of Fair Trading and the Secretary of State for Trade and Industry in the normal way—that is, individually, on its own merits.
I conclude by emphasising that the main, though not exclusive, consideration in determining whether mergers should be referred to the MMC should be their potential effect on competition in the United Kingdom. The Government's policy enables the great majority of proposed mergers and acquisitions which do not pose a threat to competition to be decided by the market, in the way recommended by my hon. Friends, without intervention from official agencies. The Government believe that there are considerable benefits in allowing freedom for change in corporate ownership and control through mergers and acquisitions. Generally, the market will be a better arbiter than Government of the prospects for the proposed transactions, and will ensure better use of assets, for the benefit of their owners and the economy as a whole. The Government should intervene only where the interests of the decision makers in the market are likely to run counter to the public interest.
The Government take the view that decisions about changes in the ownership or management of a company are generally best taken by the shareholders themselves, as the Government believe that the people best placed to make a judgment of commercial prospects are those whose money is at stake. It is not the role of the Government or statutory agencies to second guess commercial judgments. There may be a case for the public authorities to intervene in particular circumstances, typically where there are grounds for believing that the interests of private decision makers run counter to the public interest. The classic example of this divergence is where a merger confers excessive market power on the new enterprise, so that it offers the prospect of profits to the owners, but threatens to damage the public interest, for example by leading to distortion of the market and exploitation of the customer.
The current procedures for examining qualifying mergers provide a good framework within which to investigate—if necessary by a reference to the MMC—and to control mergers raising public interest issues. The same applies to leveraged offers. Where a high leveraged offer combined with other features might pose dangers to the public interest, we will also, having received the advice of the Director-General of Fair Trading, consider making a reference to the MMC.