§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Lightbown.]12.36 am
§ Mr. Geoffrey Lofthouse (Pontefract and Castleford)
Barker and Dobson plc, a small confectionery manufacturer and supermarket chain, has made a hostile takeover bid for the Dee Corporation, the country's third largest food retailer.
Dee is the largest distribution company in the country, with sales last year of £4,836.6 million. In terms of reported sales, profits and net assets, Dee is at least 20 times larger than Barker and Dobson. Gateway, a wholly owned subsidiary of Dee, accounts for approximately 13 per cent. of the United Kingdom's packaged grocery sales and employs about 68,000 people.
In addition, Dee owns F. A. Wellworth, the second largest and fastest growing food retail business in Northern Ireland, and Linfood Cash and Carry, one of the two largest food cash-and-carry wholesalers in Britain.
The financing of the Barker and Dobson bid relies on two key elements. The first is massive borrowings of about £1.6 billion, which, on the basis of the latest published accounts of both companies, would leave the enlarged group with negative net tangible assets of more than £600 million if the bid were successful. Barker and Dobson, with net assets of £30 million, is borrowing £1.25 billion to acquire Dee, which has net assets of £670 million.
Secondly, Barker and Dobson has stated that it expects to meet its debt obligations by selling all the five subsidiaries of Dee, other than Gateway, but Gateway's superstores will also be sold.
In his offer document, the chairman of Barker and Dobson said:our programme for action will … include the sale of Dee's".That will leave only Gateway's supermarkets in a severely truncated company.
The financial structure of the bid has major implications for Dee's business and employees. The £1.6 billion of borrowings, which is to be provided by a syndicate of largely foreign banks, led by Citibank of New York, would be at a floating rate of interest: 35 per cent. must be repaid in 18 months, 35 per cent. in 30 months and the remainder in 36 months. The financing package appears to stretch Barker and Dobson beyond prudent limits. What happens if interest rates rise? What happens when the borrowing facilities run out in three years? What happens if the asset-stripping exercise does not go according to plan, or if the company has a bad year? Even if the financial implications in themselves were insufficient for a reference to the Monopolies and Mergers Commission, it is clear from the DTI press notice that great concern is felt about the consequences of this bid. If Barker and Dobson is successful, it could open the floodgates to even higher leveraged bids.
The asset stripping of the Dee group and the huge borrowing liability have implications for competition in the United Kingdom food industry and for Dee's customers, employees and suppliers. The growth of Gateway as a major food retailing force has been accepted by the Monopolies and Mergers Commission as creating "a countervailing force" against such established and fast-growing food retailers as J. Sainsbury, Tesco and Asda. 454 Argyll's acquisition of Safeway has meant that there are now five leading food retailers in the United Kingdom. Barker and Dobson's bid would reduce the number of leading retailers to four, as it has stated that it will sell off the Gateway superstores and change 100 of Gateway's smaller stores to service another market.
Barker and Dobson's financing structure demands a very early sale of Gateway's superstores at a very full price. The key issue is not the combination of Barker and Dobson's almost negligible retail sales with those of Gateway. It is the sale of Gateway's superstores space of 3.2 million sq ft, plus its associated development programme, to another competitor. J. Sainsbury, Tesco and Asda are in the best position to offer to pay the highest price needed by Barker and Dobson, as they stand to gain substantial incremental benefits from the extensive additional selling space, and it is believed that a piecemeal sale would achieve that price.
The elimination of an important competitor and the simultaneous and significant strengthening of one of the other four leading food retailers must work against competition. F. A. Wellworth supplies an estimated 20 per cent. of the Northern Ireland food market. To which company will this important share of that local market fall?
Linfood Cash and Carry has a turnover of some £900 million. In order to secure an acceptable price, Barker and Dobson would have to sell to one of Linfood's two principal competitors: Booker or Nurdin and Peacock. Following such a sale, the buyer would dominate the United Kingdom wholesale trade, and prices charged to the small independent traders might well rise.
In 1987, the Dee Corporation opened 42 new stores, creating a total of 7,168 new jobs, of which 1,753 were in Scotland and 803 in Yorkshire and the north-east. Since the Dee Corporation took over Fine Fare some 20 months ago, 2,075 jobs have been created, of which 1,700 were in Yorkshire and the north-east—a total of 11 per cent. of Dee's investments.
Between now and the end of 1990, Dee proposes to open a further nine stores in Scotland, creating a total of 2,200 jobs. The proposed break-up of Dee would put this development programme in jeopardy. Many of the head offices and its divisions would be closed or severely reduced in size. Gateway alone has about 1,700 employees at Bristol and Keynsham. The new 250,000 sq ft head office, which is due to be completed in 1988, might become superfluous.
The sale of the superstores would have an effect on Gateway's distribution arrangements and lead to warehouse closures and job losses. Rationalisation would lead to a number of store closures and additional job losses.
§ Mr. Robert G. Hughes (Harrow, West)
I recognise the hon. Gentleman's general concern and his specific concern about jobs. Barker and Dobson took over a Budgen facility on the edge of my constituency and over the past year the number of those employed there has increased by 13 per cent. The record is quite good. I am not necessarily disagreeing with the hon. Gentleman.
§ Mr. Lofthouse
The hon. Gentleman is talking about a tiny firm when comparison is made with the Dee Corporation. I take the view that there is only so much 455 food to be sold in all areas and only so much money to be spent. The number of jobs to be made available is governed by those factors.
The proposed sale of the superstores would entail a costly disentanglement process, which would be destructive to the remaining Gateway business. This could lead to the loss of a number of key employees. In the systems area, for example, Gateway has the largest IBM System 38 in Europe.
The sale of the superstores would reduce customer choice in the food retailing sector. The prices of goods sold in stores transferred to the Budgen formula could increase by over 5 per cent. That is the average differential between Gateway and Budgen prices. It should be said that the Budgen range is significantly different from the range that is available at Gateway. It is likely that prices in the residual Gateway chain will rise. With a severely truncated chain of stores, the new company will not be able to buy on such favourable terms. An additional upward pressure on prices will be the requirement to service significant levels of acquisition debt despite the forced sale of assets.
The proposed sale of the superstores is likely to increase the buying power of the four remaining major food retailers, with an inevitable effect on suppliers' margins. Dee has a policy of promoting branded goods, unlike other major food retailers, and this is important for manufacturers seeking shelf space in certain markets. The need to service the massive debt and meet the demanding repayment schedule would be likely to have twin effects. Prices would have to be increased, and every possible means to improve buying terms would be necessary. It is the trade creditors of Dee—they represent about £600 million at the date of the last published accounts— who will suffer most if the group gets into financial trouble. The banks are proposing to exercise strict security over the group's assets.
Dee has been investing heavily in the long term and during its last financial year it has expanded its sales area by more than Sainsbury and Tesco put together. It is a term of the banking agreement that Barker and Dobson has entered into that Dee's capital expenditure programme should be severely curtailed. It is worth mentioning that when Dee bought Fine Fare it was stated that it would take three years to integrate Fine Fare into Gateway. Only one and a half of the three years has expired and the job is well under way and on course.
The financing arrangements proposed by Barker and Dobson for the bid, replacing equity with debt, are akin to junk bond financing in the United States, which has contributed to the structural problems of that country's economy. The implications of this opportunistic bid, which is possible only because of the proposed asset stripping and massive borrowings on which it relies, deserve the closest possible scrutiny by the authorities.
There would be a spin-off in my constituency. I may say, incidentally, that I have no connection with, and no brief for, any of the companies. Barker and Dobson is a small firm attempting to take over a much larger firm and then dispose of many of its assets. That is the only way in which it will be able to finance its borrowing.
All the takeover bids in the nation cause me great concern. Only last year in Pontefract, Tesco—one of the big four, and probably in the running for some of the assets—took over the Hillard chain after a brutal battle. While that takeover was happening, a local property developer was negotiating for land and buildings on the 456 outskirts of the town for a large supermarket complex. Since he has obtained the land and planning permission we find that Tesco is the interested party. It is preparing, with the local authority, to obtain more land, and it has informed the local authority that it intends to close the major supermarket that it purchased only last year. I do not wish to throw any suspicions about, but people in Pontefract wonder whether it knew when the takeover was happening that another big supermarket would be going up and the one that serves the centre of the town would be closed and sold for trading in other goods.
That is the takeover bid scene. I ask the Minister to request his right hon. and noble Friend the Secretary of State to reconsider his decision not to refer the bid to the Monopolies and Mergers Commission. I believe that the case I have presented tonight warrants great consideration and thorough investigation of the bid.
§ The Parliamentary Under-Secretary of State for Corporate and Consumer Affairs (Mr. Francis Maude)
It is useful to have a chance to air these issues in the House, even at this time of night. The fact that many of my hon. Friends are here to listen to what is said is evidence of that. I note in particular that my hon. Friends the Members for Harrow, West (Mr. Hughes), for Bury, South (Mr. Sumberg) and for Bury, North (Mr. Burt) are present.
The hon. Member for Pontefract and Castleford (Mr. Lofthouse) has aired matters in a temperate way. It is not helpful to overstate the case on these difficult and delicate matters, and I am grateful to him for the way in which he raised them.
My right hon. and noble Friend the Secretary of State decided last week, and announced his decision hen, not to refer the proposed takeover to the Monopolies and Mergers Commission. His decision was in accordance with the advice that he had received from his adviser on mergers, the Director General of Fair Trading. I am sorry that I cannot discuss in any detail the reasons for that decision. Representations are made to us by the Director General of Fair Trading in confidence and I must respect the confidentiality of the advice which he provides to my right hon. and noble Friend. I can say, however, that all the representations on this matter were considered carefully by the Director General, and by my right hon. and noble Friend in reaching his decision.
The hon. Gentleman talked about the concentration and the high level of merger activity among major food retailers. It is true that in 1984 it was reckoned that the 10 largest grocery retailers had about 54 per cent. of total grocery and provisions sales. Following some takeover activity—the takeovers of Safeway by Argyll, of Hillard by Tesco and of Fine Fare by Dee—that share seems likely to have increased now to over 66 per cent. of the market. In certain local and regional markets, the concentration ratios may be even higher.
Our present mergers law and policy are perfectly capable of dealing adequately with the trend towards concentration. The Fair Trading Act 1973 provides for a case-by-case scrutiny of mergers. Each merger or merger proposal which qualifies on the basis of the assets or market share test laid down in the Act is considered by the Office of Fair Trading, and the director general advises the Secretary of State on whether it should be referred. Each merger proposal must be considered on its own merits, in the light of all the circumstances at the time. Only if a 457 merger is referred to the Monopolies and Mergers Commission and the commission concludes that it would be against the public interest does my right hon. and noble Friend have powers to take action against that merger.
Despite the trend towards increased concentration in the food retailing sector, it would be wrong to assume that any merger in this sector is by definition anti-competitive and hence against the public interest; on the contrary. It is worth noting, in defence of this view, that when the Mergers and Monopolies Commission reported in 1983 on the merger between Linfood and Fitch Lovell it reached the conclusion that some mergerswhich would strengthen the ability of middle ranking chains to survive and continue to compete, and which might even go some way towards redressing the balance between them and the largest chains, should not be prevented without good reason.
§ Mr. Lofthouse
Does the Minister agree that in the example I have given in Pontefract Tesco is now the major owner of supermarkets in the district? If the bid goes through, and Tesco purchases the supermarket from Barker and Dobson, another supermarket in my constituency will be owned by Tesco, which will have a large private monopoly. What competition is there?
§ Mr. Maude
I take the hon. Gentleman's point. He will recognise that we realise its importance from the way in which my right hon. and noble Friend's announcement was made.
The Office of Fair Trading recently found that competition in the retailing sector was still strong and that, in general, lower buying prices were being passed on, to the benefit of consumers. It is clear that the matters are being kept under constant review by the Director General of Fair Trading.
Each merger or merger proposal in this sector will continue to be looked at, with a view to assessing its probable effect on competition, by the Office of Fair Trading, with the possibility of a reference to the MMC if public interest issues are raised. My right hon. and noble Friend's announcement that the proposed takeover by Barker and Dobson was not to be referred emphasises the close scrutiny which would be given to any divestment of assets following a successful acquisition by the bidding company.
The announcement read as follows:This proposed merger is pursuant to a plan which is said to include also the divestment of certain assets of the combined company. The divestments account for a substantial proportion of retail food distribution in the UK. Any such divestments would fall to be considered under the merger provisions of the Fair Trading Act in the usual way, in order to determine whether they should be allowed to proceed. Such consideration would need to take account of concern about the concentration of food retailing, both in the country at large and in particular parts of it. The weight given to such issues would be course depend upon who were the intending buyers".
§ Mr. Tony Blair (Sedgefield)
I am grateful to the Minister for giving way and to my hon. Friend for allowing me to intervene. We know that the Barker and Dobson bid can only be financed out of the disposal of assets after the bid. That is beyond dispute. May I put to the Minister two points? First, given that almost certainly the assets will be disposed of to one of the other main competitors, would we be more prescient if we investigated 458 the competition aspects of the body now rather than waited for the bid to go through and a disposal to occur? Secondly, a leverage bid means that the buyer can finance the sale only by disposing of the assets. Is it not time that we had a good look at those bids in principle and measured them against the public interest?
§ Mr. Maude
I shall come to the hon. Gentleman's second point about the principle of leverage bids. On his first point, he said that the proposed bid involved a necessary divestment after the merger, and asked whether we should look at it on that basis. The answer is not to look at it at this stage. We must look at this merger and the market share of the combined companies.
If the bid were successful and the combined company chose to divest some assets to another purchaser or several purchasers—it is clear that a number of different types of assets are contemplated—it would be for us to look at the implications of sales to particular purchasers to find out the effects of the mergers on competition. That would be the right time to do that. We cannot speculate on the implications of hypothetical buyers, but we can make it clear, as we have done, that we are aware of the concern and that the Director General of Fair Trading will look carefully at the implications of any divestments.
§ Mr. Colin Shepherd (Hereford)
Dee Corporation has utilised a substantial sum of public money, certainly in my constituency, in developing a major distribution warehouse which would be part of the sell-off proposals. Since this would be redundant and part of the original proposal, would it be the Government's policy to claw back that public money? I should like to know the answer.
§ Mr. Blair
I should like to press the Minister on his statement that he cannot look into the bid now. What would happen if the bid were successful and the new company decided to dispose of the Gateway superstores to one of the main competitors, so that a reference to the Monopolies and Mergers Commission became activated? What would be the position in terms of certainty and for the employees and shareholders if, having bought the company knowing that it could finance the sale only through the disposal, there was then a reference to the MMC and the bid were blocked?
§ Mr. Maude
That would have to be considered at the time. We cannot speculate on it at this stage. I must proceed; there are only three minutes left and I want to deal with the important point of leveraging.
The White Paper which we published a couple of months ago made it clear that the result of the review of mergers policy was that competition should continue to be the principal, although not the exclusive, consideration that my right hon. Friend bore in mind in deciding whether to refer the proposed merger. There are other public interest matters to be taken into account, but we made it clear that we would look principally at competition.
It is sometimes suggested that a leverage bid and the shareholders' response to it are intrinsically contrary to the public interest. I do not accept that. There have been two recent cases where leveraging of the bid has been considered to have raised public interest issues which 459 deserved further investigation by the commission— the Elders IXL's proposed takeover of Allied Lyons and the offer by Gulf Resources for IC Gas. They were considered by the commission.
There were other cases where a reference was not considered appropriate because shareholders and the market were best placed to decide on the merits or otherwise of the proposals. Two cases which spring to mind are the Demerger Corporation's bid in 1986 for the Extel Corporation and Valuedale's bid later the same year for Simon Engineering. It is worth noting that in both cases the offers were unsuccessful in the market and were rejected by shareholders.
The fact is that highly leveraged bids can and do fail in the market, which shows that shareholders — for a number of the reasons raised by the hon. Member for Pontefract and Castleford—are quite often unprepared to support offers which seem to them too risky. That has been shown to be the case.
The financial arrangements and the pereceived ability of the bidding management team to carry the offers through, along with the size of the potential benefits which have to be set against the risks, are all matters for the 460 shareholders to consider, and this is a healthy check on highly leveraged proposals. There are also checks in the City code on takeovers and mergers.
These are matters which have to be considered in each individual case. There is nothing inherent in a highly leveraged bid which means that the public interest requires it to be considered by the Monopolies and Mergers Commission. Each case has to be considered on its own merits. We make it clear that competition is the principal consideration that we shall keep in mind, and that will continue to be the case. If this bid turned out to be successful and divestments were subsequently made, competition would be our principal consideration at that stage.
But my right hon. and noble Friend has decided not to refer this proposed merger, in full consideration of all the issues and in accordance with the advice given to him by the Director General of Fair Trading, and I have, I am afraid, to tell the hon. Gentleman that I cannot hold out the prospect of that decision being reconsidered.
§ Question put and agreed to.
§ Adjourned accordingly at six minutes past One o'clock.