Home > Conflictos de Interés y Transparencia, Directors`duties > Work and Pensions and Business, Innovation and Skills Committees: The BHS Report

Work and Pensions and Business, Innovation and Skills Committees: The BHS Report

The inquiry (1 and 2) has tried to shed light into the reasons why some 11.000 BHS workers may be considered direct losers, up to 20.000 when pensioneers are included, many more if we consider eventual job losses in BHS providers, and up to 11 million when current and future pensioneers in other firms, (all of them contributors to the Pension Protection Fund that will afford part of the damage) are counted.

The big numbers also point to some winners: the company was bought in 2000 for £200 million; in the period 2002-04 some £423 million were given in dividends, (more than the £208m in Net Profit), £307m paid to the Green family. Goodwill and some real estate transactions allowed to pay these amounts, but also reduced the firm capacity to fulfill its pension obligations, invest or later afford the loss-making period until 2009, so that in 2014 the company had negative equity and was largely financed  by debt, (part of it granted by Green`s other companies). Operations didn`t really go well, as sales remained flat and profits might have increased mainly as a result of cost cuts.

Pension Schemes. A group of trustees was in charge of collecting enough funds from workers and firm so as to cope with future defined payments. Companies having these schemes act under the regulatory scrutiny by “The Pensions Regulator” or TPR and over the “insurance” coverage by the “Pension Protection Fund” when insolvency and lack of funds appear. Although when Mr Green bought BHS the pension scheme was slightly over-funded, it soon started to accumulate deficits that amounted to £350 million in 2015. A deficit further evaluated in £571 m in 2016 which subsequently increased as a result of some macroeconomic trends.

The board of trustees apparently tried to get more funds or even some security on company assets to keep the balance of the Pension scheme. The company rejected to increase contributions. Recovery plans for deficits increased from 12.5 years in 2009 until 23 years in 2012. Mr Green was fully aware of those deficits, as the accounts, negotiations with insurance companies for buy-out procedures and meetings and interactions between trustees and financial managers witness.

The Project Thor.

It was a plan designed by Deloitte which recommended huge cost savings, write-off of the BHS intra-group debt, and a restructuring of the pension scheme, where ¾ of the deficit was to be beared by pension members (only ¼ by the Green family), and was firstly offered to the trustees by January 2014, who rejected to approve it for lack of information, lack of reliable data, and lack of time. By July 2014 the Green family sent a petition to the TPR for the Thor plan approval. TPR asked trustees and the Green family to provide information giving assurance that “moral hazard” provision by BHS (the sponsor employer) had and would be complied with, (linked parties transactions, dividend history and so on). At this moment, (January 2015) Mr Green paused project Thor, which was a clear condition for any eventual bidder to execute an acquisition.

In February 2015 a decision was adopted to sell BHS to RAL, once Mr Green rejected project Thor and its financial and/or oversight consequences. But RAL`s deal only included an agreement to (jointly with the Green family) provide the 10 million annual allowance to the pension scheme considered in the 23-year recovery plan. Moreover, it seems that Mr Green was successful at providing info about the business but not about the pension scheme, and in forcing RAL into the acquisition anyway. Grant Thornton gave its negative opinion about the scheme and about the unsustainability of the business if a Thor-like plan wasn`t adopted. Legal advisors also told RAL about the true deficit, and the lack or evidence about the trustees or TPR`s approval of any Thor plan. In march TPR started a more aggressive engagement period with BHS and its main shareholder, or so it intended. But the sale was executed, with only elusive compromise by RAL to solve the pension deficit, so that TPR initiated an anti-avoidance procedure.

I will avoid explaining the deficiencies of the regulatory structure as explained by the Committee, (as the focus in this post refers to the company governance failure). I would not focus either on the acquirer`s responsibility, which clearly accepted obligations for large amounts of money without any due care and risk evaluation.

Selling BHS.

Finding a buyer was a challenge for a company only considered a going concern once the controlling shareholder accepted recurrent financial support, (giving its loss-making history and huge pension obligations).

Mr Green started conversations in 2013 with Mr Sutton to that end, which were given an end in May 2014, (for Mr Green`s concerns about his reputation). Dominic Chappell, already working for the former stepped in then to structure the deal. With a history of bankruptcy and other bad practices records and no experience in retail or big business, Mr Chappell shouldn`t have been considered a reliable buyer. As for the advisers, they were almost all well-reputed firms, that helped give Mr Chappell its credibility, although it must be said their job didn`t go beyond the know-your-customer duties. Due diligence by Olswang and Grant Thornton started in february 2015 once the term sheet was signed. It was rigorous and some points were highlighted: the need for £120 m of working capital, some funding representations by Mr Green considered not easy to execute, the pension scheme itself and the lack of any assurance that any recovery plan could be implemented, etc. But in march 11th the acquisition had been approved by both boards. The fee structure for these advisers was nevertheless not well-balanced in terms of incentives, (prone towards transaction execution). Goldman Sachs appears to have evaded offering an opinion, opting instead for what they called “preliminary observations”. PWC was the auditor and considered BHS as a going concern just because of its shareholder (Taveta) financial support, even knowing that BHS was to be sold, and in spite of the doubts raised by other advisors about the new shareholder´s support.

The deal: the committee analyses several aspects:

  • Sources of finance: RAL promised £120m in working capital to be provided by Farallon Capital plus £35m in equity. The term sheet describes the first as a (for three periods) rollover £40m loan, and subject to precedent conditions, which leads the committee to think the finance support was not really to be provided. As for the £35m provided in equity, the money had been sent to an escrow account by a third firm (ACE) in order to acquire a real estate property owned by the Green family, so it was not RAL´s money nor it constituted equity for the transaction at all. Both sources failed, but Mr Green succeeded in getting some £25m from HSBC for BHS just a day after the deal was executed. Some additional funds were found in so punitive conditions that the company P&L and BS was further damaged.
  • BHS`s position the day of the acquisition. The BS showed working capital slightly over £90m considered as a minimum by management, but £38.5m were short term loans recently granted, part of them in punitive terms, some other assets were not so liquid, and some others were immediately to leave the company with no return.
  • So in brief: RAL provided no equity, no working capital and no retail experience to the board and Ceo role. Why was BHS sold to them? Why did RAL buy with only remote reassurances by Mr Green to continue supporting BHS?

Taveta Structure

Taveta (Green family) Corporate Governance.

  1. Company structure. Taveta Investments Ltd (TI1) is the owner of Taveta Investments 2 (the owner of the Arcadia and the BHS groups). TI1 directed the retail strategy and is owned by Taveta Ltd based in Jersey and having Mrs Green as unique beneficial owner. Besides the basic structure, the complex web of companies, located in non-transparent jurisdictions makes it difficult to assess the fairness of the intercompany transactions.
  2. Intercompany transactions. There were many. (i) Carmen Properties bought and leased back many of the real estate BHS´s assets, and was later transferred to BHS as part of the deal. Mildenhall Holdings also replicated this kind of deal. Wilton Equity owned and sold BHS´s head office, and later sold it at a profit to Arcadia.  (ii) Some other group companies also financed BHS in lucrative terms for the family. The committee asserts the family benefited from these transactions, (rendering rents and interest to their companies in low-taxed locations and reducing BHS taxes, but increasing its cost base, reducing their assets at a “fair?” price and increasing their debt in “fair?” conditions.
  3. Corporate Governance. Many of the companies shared directors, (family members and partners many times). Apart from the difficulties in assessing whether directors complied with their duties or not, it was evident that boards were dominated by the family and did not always fought for the specific company`s interest. Checks and balances in related party transactions were not assured either. The committee thinks the interests served by directors were those of the Green family.
  4. The agreement to sell BHS. The Chairman of the selling company played no part, instead a group of Arcadia members were selected to assess on the disposal, (with no agenda nor instructions). No minutes, no report to the board at all. Independents didn`t lead nor put the group`s conclusions into question, and the Taveta board approved the deal in one day.

Ral`s ownership of BHS.

Mr Chappell relied on the previous management´s Business Plan to turnaround the company, relying mainly in closing loss-making stores and stop paying rents at higher than market prices. This plan was delivered too late, and results about sales and margins growth was disappointing. Besides, Mr Green rejected to inject funds to the pension funds unless the moral hazard investigation stopped, which nobody could decide (at least at BHS). And the RAL team was unable to inject funds, via substantial asset sales or via equity or “reasonable” loans. What`s more RAL billed fees for big amounts and for different concepts and also received loans from BHS. The board was overall conflicted, and related party transactions, and funds and fees extracting was the rule applied by (some) members and the Chappell family. The committee concludes that the board knew they had a bankruptcy case, that they owed fiduciary duties to creditors and not shareholders, and their attitude indicated they could have breached these duties. Neither Mr Chappell nor his firm (RAL) were appropriate acquirers.

Mr Green continued to be involved, as his Arcadia firms still rendered services to BHS, and was one of the decision makers when an administrator was chosen on April 2016, as Arcadia was entitled to do so. Mr Chappell tried still to sell the company, but administrators blocked the initiative as the offer (by Sports Direct) did not protect the creditors` interests.

Additional Conclusions

Beyond evident conclusions out of what has been explained, the Committees ask for broader analysis around the environment in which capitalist forces deploy, and particularly corporate governance structures and compliance in the private company ecosystem.

(1) See an article describing problems here: http://uk.businessinsider.com/sir-philip-green-bhs-pension-fund-2016-7

(2) See the report here: http://www.publications.parliament.uk/pa/cm201617/cmselect/cmworpen/54/5402.htm

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