Competition Policy (Hansard, 1 March 1989)

§ Mr. Nicholas Winterton (Macclesfield)
I am pleased to have the opportunity of raising the important subject of competition policy in the United Kingdom, particularly as it relates to the public interest and to the workings of the Monopolies and Mergers Commission. In developing my case, I wish to ask the Minister a number of relevant and important questions.
Is he satisfied that the Government's preoccupation with competition issues will not lead to substantial parts of British industry being put at risk by the level of investment in United Kingdom companies by highly geared entrepreneurs? It appears to be recent Government policy to have regard only to the financial difficulties likely to flow from high gearing and low interest cover where such financial difficulties could have an adverse effect on competition. Why do the Government no longer consider that the possibility of financial failure of itself involves real public interest issues?
Does the Minister think that companies with extremely complex and opaque shareholding structures, established in countries such as Australia, that do not have the same disclosure demands as this country, should be forced to make full disclosure of their precise shareholding structure and of directors' remuneration before being permitted to acquire United Kingdom companies? In particular, should an overseas company with a record of very different, and less acceptable, accounting standards be considered by the London international stock exchange for a full listing and share quotation?
Does my hon. Friend the Minister feel that overseas companies attempting to take over British companies with substantial assets and large numbers of employees should first adopt accounting standards and conventions practiced in the United Kingdom? I believe that this is very much a matter of public interest.
Does the Minister agree that the needs of highly geared companies for cash flow mean that there is inevitably a potential adverse effect for the consumer and the employees in acquisitions by such companies, since this will inevitably create a need for higher prices on the one hand and lower costs on the other? For example, in the case of Scottish and Newcastle Breweries and Elders IXL, Scottish and Newcastle would be likely to shed some 3,500 jobs.
For the benefit of my hon. Friend, let me say that if Elders is permitted to proceed with its bid for Scottish and Newcastle Breweries and is successful in taking over the company at £5 per share, Elders will be paying approximately £2 billion for the company. This would cost it £260 million a year in interest. As the Scottish and Newcastle profit is likely to be about £160 million in 1989–90, the interest cost of Elders IXL borrowing, above the company profitability, would be £100 million per annum. This would equate, first, to a sell-off of some £800 million worth of assets of Scottish and Newcastle and, secondly, redundancy for 3,500 employees. In short, this is what an Elders IXL takeover could mean for Scottish and Newcastle Breweries, for British industry and for employment in this country.
372 Is not the Minister concerned that the proliferation of bids from companies based outside the United Kingdom may result in important areas of British industry being controlled from outside the United Kingdom, thereby moving the centre of decision-taking outside our country, with adverse consequences for United Kingdom regions and for the infrastructure of services provided in those regions, which are so often dependent on local demand?
Companies with high levels of gearing and low levels of interest cover by reference to normal United Kingdom standards tend, in time—I am sure that my hon. Friend the Minister knows this—to face financial difficulties. Such pressures also lead such companies to seek acquisitions which are rich in cash flow and assets and where extraordinary profits on break-up can help fund the companies requirement for dividends and debt servicing. Is that not just typical of the record and reputation of Elders IXL? The activities of certain foreign companies, notably Australasian companies, in the United Kingdom takeover market, having high gearing and low interest cover levels, is a matter of deep concern to me, the House and the British public.
There is, in many quarters of finance and industry in Britain, a considerable unease over the motivation and influence of that group of Australasian entrepreneurs whose sights appear to be set on raiding United Kingdom assets. Can we be happy that the unfettered activities of those modern-day buccaneers are achieving anything constructive for the future of the United Kingdom economy, or is their motivation largely self-interest, with the inherent risk remaining that assets will be moved offshore and United Kingdom taxes skilfully avoided to the long-term disadvantage of this country.
Taxation has been an issue in Australia where, inter alia, Elders has been a thorn in the flesh of the tax authorities. They have been in considerable disagreement about the amount of tax paid by the Elders group of companies into the Australian national coffers. There must be a likelihood as already recently demonstrated by Equiticorp and Mr. Holmes á Court, to name but two, of serious risk to others in the financial strategies of those companies.
A good example of highly geared Australian companies seeking to acquire United Kingdom industrial interests is the present attempt by Elders IXL to acquire Scottish arid Newcastle Breweries. Elders is a company with various cross-shareholdings, common directorships and other links with numerous further companies. A company called Harlin, which is based in Monaco, has some 20 per cent. of Elders ordinary share capital undiluted together with various options. Another company called Petitio owns a further 18 per cent. of Elders undiluted share capital. Petitio is owned 50:50 by AFP Investments Ltd. and Goodman Fielder Watty. Harlin and Petitio together control nearly 40 per cent of Elders undiluted share capital and if Harlins options were exercised it would control nearly 46 per cent. of undiluted capital.
It is crucial to understand the shareholding structure in order to appreciate the indebtedness and crippling level of gearing that surrounds Elders IXL. Harlin has gearing of some 600 per cent. and Petitio has a gearing of nearly 200 per cent. I know that my hon. Friend the Minister is aware that gearing ratios show the ratio of debt to shareholders' funds. Fairly calculated, the gearing ratio of Elders is 373 about 218 per cent. now and will rise to just under 400 per cent. on the acquisition of Scottish and Newcastle Breweries. That is a ratio of nearly 4:1.
Harlin is a rather interesting company. Elders' 1988 report stated that Harlin was jointly owned by senior executives of Elders and their associates, the Elders superannuation fund and AFP Investments. However, it appears that all the shares in the company, as at February 1988, were held by the directors of Elders, the majority being owned by John Dorman Elliot. At that time the company was known as Pyalong Ltd.
What is worrying is that that appalling monumental indebtedness and fearsome gearing is not getting any better for Elders IXL, as can be seen from its interim figures for the six months to 31 December 1988, which appeared in mid-February. It announced an increase in profits of 12 per cent., although that depended on a low tax charge of about 20 per cent. of profits. Profits before tax and abnormal items would be down by 18 per cent., and, before interest, down by 23 per cent. The supposed increase in post-tax profits of 12 per cent. was stated by Elders to represent an increase in earnings per share of 5 per cent. However, for the present statement, Elders has recalculated earnings per share on the basis of the number of shares outstanding at the end of the period. Had it continued to apply the basis that was used last year, earnings per share would have fallen by 5 per cent.
That shows the sort of fraudulent activities that that company is prepared to get up to hide its true indebtedness and gearing.
In September 1986, the Monopolies and Mergers Commission—I refer to the Elders-Allied Lyons report—asked, first, that the Bank of England and the stock exchange should consider whether the appearance of highly leveraged bids in the London market made desirable the introduction of any new powers of control; and, secondly, if so, whether effective control could be exercised by reference to levels of capital gearing or interest cover. Thirdly, it suggested that the Department of Trade and Industry, represented by my hon. Friend the Minister, and the appropriate City regulatory authorities might consider whether any change was desirable in the rules to require the consent at a general meeting of the shareholders of the bidding company before a bid may be completed.
Will the Minister report on what consideration has been given by him and his Department—and with what result—to whether any such new powers of control or rules are desirable? If it is considered undesirable to introduce guidance or new powers of control in relation to gearing and interest cover for all companies, large or small, would it nevertheless be desirable in relation to large takeovers, in which significant United Kingdom assets, substantial United Kingdom employment and other issues are involved, for minimum standards of gearing and interest cover to be insisted on by the Government of this country?
Does the Minister support the concept of a future British brewing industry which two or three mega-companies dominate, as in Australia, where Elders and the Bond Corporation supply over 90 per cent. of the beer market? Is that in the public interest? Is that not a danger to competition? More particularly, is the Minister aware of the statement by Elders which was reported in The Sunday 374 Times of 12 February of this year that Britain will follow other major beer markets such as Australia, America and Canada, which are characterised by market leaders with up to 40 per cent. market shares, and that it expects to be able to drive up its share of the United Kingdom beer market to more than 40 per cent.?
The House should know that in Australia there is a body called the National Companies and Securities Commission—rather like the United States Securities and Exchange Commission—which, in 1988, conducted an inquiry into Elders' relations with the Broken Hill (Proprietary) Co. Ltd.—Australia's largest company.
Is the Minister aware that the NCSC report was highly critical of Elders and that, had its detailed findings been known in time, the MMC might not have given Elders the clearance that it gave at the time? Elders now claims that that clearance by the Monopolies and Mergers Commission is proof positive of its fitness to own important parts of United Kingdom industry; hence its attempts to acquire Scottish and Newcastle Breweries and also its attack upon Metal Box.
More particularly, from the NCSC report, is my hon. Friend the Minister aware that Elders was in a position to present itself to the Monopolies and Mergers Commission in the Allied Lyons referral only as a company strengthened by the subscription of BHP to 1 billion Australian dollars of capital by, first, inducing at least two of the banks to participate in the loan to finance that transaction by misrepresentations as to the true nature of Elders' intentions; secondly, failing to disclose to the banks the forthcoming issue of preference shares to BHP for 1 billion Australian dollars; and, thirdly, "green mailing" BHP to make that subscription using leverage which Elders had acquired by its acquisition of a 19.9 per cent. interest in BHP?
Is the Minister aware that Elders caused the terms of the separate undertaking it had given to the banks in relation to Allied Lyons to be given in a side letter for the purpose of shielding its terms from the Monopolies and Mergers Commission, that the NCSC declined to accept the evidence of Elders on some matters and that the evidence it gave conflicted directly with the evidence given on behalf of at least one of the banks?
In allowing Elders to acquire Courage in the autumn of 1986, after the publication of the NCSC report, did my hon. Friend the Minister and his Department take into account the findings of the NCSC report; and, if not, why not? If they did, why was it not thought right for the Monopolies and Mergers Commission to be asked to reconsider the issues in the light of the detailed findings of the NCSC concerning Elders?
Does the Minister consider it desirable for one major brewer—Elders-Courage—to achieve its desire to control one of the three major suppliers of cans to the British brewing industry? I refer to Metal Box. That may have the result of denying a source of can supply to the rest of the United Kingdom brewing industry and may increase the concentration in the supply of beer and cans. I put a straightforward question to the Minister: does he think it desirable for one major brewer—Elders-Courage—to purchase a major supplier of cans to the British brewing industry? Is that what competition is about?
I shall now move briefly to the issues raised by the unsavoury events of the morning of 10 November 1988. [HON. MEMBERS: "Hear, hear."] I am grateful to my hon. Friends for coming to this debate and showing their 375 support for what I am about to say. I was speaking about the morning of 10 November 1988 when Elders chose to fly in the face of accepted City conduct by ignoring the gentlemen's agreement between industry, the Office of Fair Trading and the Department of Trade and Industry that after a reference no further purchases of the shares of the company being bid for should be made.
That shameful 45 minutes of casino trading was described by my right hon. and noble Friend the Secretary of State for Trade and Industry merely as "regrettable", but was apparently considered by Elders to be acceptable financial conduct. It resulted in Scottish and Newcastle Breweries suffering from actions that have now been rendered impossible by the Department's new practice of issuing what are known in the City as "Elders orders". Such practice is now reflected, as the Minister will know, in clause 100 of the new Companies Bill. In the light of that, does the Minister not consider it outrageous for dealers and market makers associated with a bidder in a bid situation to have sold short to the bidder shares in the target at considerable profit to the parties concerned? I put that question to him, and I hope that I will receive an answer.
Where holdings of material influence are acquired by bidders prior to, or after, a bid being referred, can the Minister assure the House that in the event of an adverse finding by the Monopolies and Mergers Commission he will take all the necessary steps to ensure that the divestment of such material interest contrary to the public interest will be achieved as swiftly and effectively as possible?
I fervently hope that at no time, or under any circumstances, will anyone be able to claim that Elders IXL and Mr. John Elliott were in a privileged position because he is the president of the Australian Federal Liberal party, which is the Australian equivalent of the Conservative party in the United Kingdom and because he has employed the services of a former Conservative Member of Parliament who lost his seat in 1987 and who, for a time, served as a Minister in the Scottish Office and in the Department of Trade and Industry.
Can the Minister give an assurance to those who are deeply interested in the whole issue and in the principles at stake that, if the Monopolies and Mergers Commission finds that the merger between Elders-Courage and Scottish and Newcastle Breweries, creating the largest concentration in beer supply and pub ownership in the United Kingdom, would be against the public interest, the Secretary of State will not overrule the finding of the Monopolies and Mergers Commission?
In conclusion, I give a clear message to Mr. John Dorman Elliott, who brags to the Australian press and to the boys back home that he has easy access to No. 10 and to the Secretary of State for Trade and Industry. His colleages in the Australian Liberal party may be impressed but—and I say this rhetorically—"You cannot buy after hours shares in 10 Downing Street." Again I say to Mr. John Dorman Elliott of Elders IXL that I do not believe that his taking over of Scottish and Newcastle Breweries is in the national interest or the public interest, and that No. 10 Downing Street is certainly not for sale.

§ The Parliamentary Under-Secretary of State for Corporate Affairs (Mr. Francis Maude)
My hon. Friend the Member for Macclesfield (Mr. Winterton) has put a number of comments in his characteristically forthright way and has asked a great many questions. I know that this subject is of great concern to him and to the whole House and we have listened with respect to the way in which he has put his views. I am glad to see in the Chamber my hon. Friends the Members for Dumfries (Sir H. Monro), for Eastwood (Mr. Stewart) and for Thanet, North (Mr. Gale). I know that they have a close interest in this matter.
I listened with interest to my hon. Friend the Member for Macclesfield, who said in what I suspect was an optimistic frame of mind that he hopes that I will answer all the questions that he asked. I think that he understands that, because of the subject matter, it simply is not possible for me to do so.
My hon. Friend spoke principally about the Elders IXL bid for Scottish and Newcastle Breweries. Those issues are now in the process of being investigated thoroughly by the Monopolies and Mergers Commission. The MMC is to report by 8 March this year, which is next week.
It is for the MMC to decide whether the merger would be against the public interest, in accordance with the provisions of the Fair Trading Act 1973. It would be entirely inappropriate for me to comment on this particular case while it is in the commission's hands, as any such comment might prejudice the conduct of the M MC's inquiries. The MMC has a duty to take all relevant matters into account when preparing its report.
My hon. Friend—and indeed any other interested person or body—has had ample time to put his views to the commission during the course of its inquiry. I do not ask whether my hon. Friend has done so, but he is experienced in such matters and I am sure that he will have taken that opportunity.
The reference of this bid to the MMC thus falls full square within our usual policy on mergers—that the main criterion for deciding whether to refer a bid or merger to the MMC should be the effect on competition in the United Kingdom. However, it does not follow that the bid will automatically be blocked. There is a power to block the bid only if the MMC finds it to be against the public interest. If it finds that the merger is not against the public interest, my right hon. and noble Friend has no powers to take any action.
While competition is the main consideration in considering whether to refer a bid or merger to the MMC, my right hon. and noble Friend retains the power to make a reference on other public interest grounds. I understand, of course, that the uncertainty associated with a merger can be disconcerting for those concerned, especially for the work force of a company that is the object of a bid. I know that all those who are employed by Scottish and Newcastle are making their fears and anxieties known and—perfectly properly—my hon. Friend has written to me on their behalf on several occasions.
It has been for the MMC to examine the issues put to it over the past months. Although we have made it our policy to make competition the principal consideration when deciding whether to refer a merger, the MMC is not 377 restricted by that consideration. It can consider all aspects of the public interest, and has a duty as well as a power to take all relevant matters into account.
My hon. Friend mentioned takeover bids for companies based in the United Kingdom by companies based overseas. There is perhaps a tendency to infer from the remarks that he has made tonight, and from remarks by others concerned about the issue, that the process is entirely one way. I think that my hon. Friend will know that the reverse is the case. It appears from the past 12 months for which figures are available that Britain is very much on the offensive.

§ Mr. Nicholas Winterton
I am not concerned about straightforward fair competition takeovers of companies here by companies abroad, or vice versa. I am concerned—and I associate my concern with this takeover—about the extraordinary share structure of the company and its massive indebtedness. Will my hon. Friend direct his remarks to those issues?

§ Mr. Maude
I think that my hon. Friend will understand that I cannot do that, because those are precisely the sort of matters which, no doubt at his instigation and that of others, the MMC is investigating at present. It would be quite wrong of me to express an opinion now.
My hon. Friend expressed views on overseas takeovers of British companies in general. Over the past 12 months for which figures are available there were considerably more than twice as many takeovers by British companies of overseas companies as the reverse, certainly in terms of value. We are rather good at that in this country; it is a sign of the confidence and expertise of British business. I am sorry that I am not able to answer my hon. Friend's interesting questions, but I think that, with his considerable experience in these matters, he will understand why I cannot do so.

§ Mr. Winterton
Will my hon. Friend direct his mind to one or two other questions that I put about the MMC's observations on other occasions, relating to earlier issues referred to it, suggesting that the Government might act?

§ Mr. Maude
In so far as those observations relate to a previous inquiry by the MMC into Elders IXL, I think that my hon. Friend will understand that I cannot do as he asks. I will, however, set out clearly our views on the general issue of "leveraging". We will not decide to refer a bid or merger to the MMC simply on the basis of leveraging. We regard competition as the principal criterion for referring a bid. If competition is likely to be damaged, or if a serious competition issue is raised by a merger—my hon. Friend made much of competition in respect of this case—we will refer it. Competition, indeed, was the issue that prompted my right hon. and noble Friend to refer the bid. All that that means is that an issue merits full investigation by the MMC, and that is taking place.
Although it is our policy not to make a reference to the MMC on the basis of leveraging alone, if a bid is referred on competitive grounds—as this bid was—the MMC wil not be debarred from looking into all such relevant matters. I can say no more than that, but my hon. Friend has had the chance to make representations to the MMC.

§ Sir Hector Monro (Dumfries)
May I take up the issue of the public interest? Will my hon. Friend give me an absolute assurance that he will take into account the fact that a major loss of jobs in Scotland, particularly the loss of one of Scotland's biggest businesses, would be catastrophic?

§ Mr. Maude
That issue also will no doubt have been put to the MMC, and, as I have said, the MMC has a duty to take all relevant matters into account—certainly the matters put to it. My hon. Friend has made his point vigorously.