Oral evidence: Pension Protection Fund and Pensions Regulator HC 55

Oral evidence, 7 June 2016.

Witness

Robin Saunders, Managing Partner of Clearbrook Capital Partners LLP, gave evidence.

Chair

Ms Saunders, thank you very much for attending. We are very grateful. For the purposes of the record, could you tell us who you are and in what capacity you are before us? What are you going to speak to us about?

Robin Saunders

I have been asked to speak to you about my relationship with Sir Philip and my interaction with Paul Sutton.

Chair

I will start with that, if I may. What is the relationship between yourself and Philip Green? How far back does it go? What is the current status?

Robin Saunders

Would it be helpful just to describe who I am, to put it in context?

Chair

Yes, please.

Robin Saunders

My name is Robin Saunders. I have a private investment firm called Clearbrook Capital. I graduated with a degree in finance in 1984 from Florida State University. I worked at a number of financial institutions in my career, rising through the ranks and holding various management positions. In 1999 I was with a bank called Westdeutsche Landesbank. That was a state-owned German bank with about €330 million of assets. I ran a group that was called asset securitisation and principal finance. That is the period in which I met Sir Philip. We looked at a transaction together in the fall of 1999 that did not go forward and then in early 2000 my institution arranged the financing for the acquisition of BHS.

Chair

You received equity as a result of that. Is that correct?

Robin Saunders

I did, as did the bank. WestLB and Barclays co-led that financing of £200 million.

Chair

Did you lead on that project?

Robin Saunders

Yes, together with Chris Coles from Barclays.

Chair

Is it common that people who lead on projects on behalf of financiers receive equity investments? Is that what would normally happen?

Robin Saunders

It was not unusual for a private equity style transaction for a leader of a principal-styled investment—and it was a highly leveraged transaction. It was not unprecedented that a transactor would receive a small equity stake.

Chair

Could I ask about dividends from BHS? You received dividends in the period 2002 to 2004. Is that correct?

Robin Saunders

Correct.

Chair

At that time, dividends were exceeding operating profit. Did you ever raise concerns about that? Did you consider that unusual or perhaps posing a risk to long-term financial viability?

Robin Saunders

As in normal corporate governance, you cannot issue a dividend without significant or sufficient distributable reserves, which the company had in each of those years.

Chair

Essentially the loan was taken out to cover the dividend, was it not? It was not a dividend in the strictest possible sense.

Robin Saunders

Yes. The company was extremely cash-generative and in its own right it was an extremely well run company. The margins were fantastic. I have absolutely no criticism of the way the company was run and the way the cash was managed in the company.

Chair

How and when did you meet Paul Sutton?

Robin Saunders

I met Paul Sutton in very late January of 2013. He, like many entrepreneurs who come to my firm, had myriad transactions he wanted to discuss. They were very exploratory potential transactions. He mentioned in that period that he was also interested in buying a retail platform.

Chair

Do you get lots of contacts? How do you weed them out? How did you see, if I am using the right term here, that Paul Sutton was legit?

Robin Saunders

As a normal course, if we have a couple of conversations with any person that we do not know, we do a desktop search, we speak to our contacts in the marketplace and we do an internet search. Nothing rose to the surface that would alert us to any problems with Mr Sutton. We continued with very casual discussions on a few subjects for a couple of months. Had we been engaged, I should emphasise, as would be the case for any regulated firm, we would be carrying out full legal diligence on the principals of that transaction. We never got to that stage. That is basically how we met.

Chair

That was in January 2013?

Robin Saunders

Correct.

Chair

What happened subsequent to that?

Robin Saunders

A few months later, I met with Sir Philip and he mentioned that he would like to sell BHS, to focus more on Arcadia, I guess—I might be surmising that—and I said, “I have recently met an entrepreneur who I am told has sufficient capital to do large acquisitions. Perhaps you want to meet him”. He said, “All right, let’s do that”. I arranged a meeting between the two of them, Sir Philip and Mr Sutton, in mid-April of 2013.

Chair

You introduced Sir Philip Green to Paul Sutton?

Robin Saunders

I did. Correct.

Chair

To the best of your knowledge, they had not met beforehand?

Robin Saunders

Correct.

Chair

All right. Did you work up Project Albion?

Robin Saunders

No.

Chair

You look like you do not know what Project Albion is.

Robin Saunders

I remember the name from Mr Sutton’s bid, yes. I did not work it up, no.

Chair

When did the involvement with Paul Sutton come to an end?

Robin Saunders

In late June, early July 2013.

Chair

Why was that?

Robin Saunders

As we were exploring various potential projects, as we do, we looked at hundreds of transactions and we looked at a few with Mr Sutton and other people that we met in that time period. None of them were coming to fruition. Sir Philip gave me a call, having introduced them. I do not think I attended any other meeting apart from the first one with the two of them. Sir Philip gave me a call and he said, “This is not going to happen”.

Chair

When was that call?

Robin Saunders

I believe it was in late June of 2013 because by mid-July of 2013 there was no further correspondence with Mr Sutton. My colleagues and I were checking our e-mails over the weekend and we could not find anything after that with Mr Sutton.

Chair

It had all come to an end by that point?

Robin Saunders

Correct.

Frank Field

Robin, can I ask you about Sir Philip? It seems to me that you were the agent that took him from where he was to the premier division. He became a very big player. Do I describe your role accurately?

Robin Saunders

I worked for a state-owned bank, as I mentioned, and I could do nothing without the support of the credit committee, the board and so on, so I do not think I can take credit for anything like that. As an institution, we were very supportive of Sir Philip.

Frank Field

It is just it seems to me that he entered the big division when he got BHS and then it opened the door to others. He was, in a sense, on the national stage, where he was not before. I wondered if you might tell us a bit more. How did you meet Sir Philip?

Robin Saunders

Gosh, this is a long time ago. We were introduced by mutual friends in 1999 and he had just completed the Sears transaction. I was very impressed by that. I do not remember much about it now but I remember thinking, “What an innovative transaction”. He made a remarkable amount of money for the investors in that transaction in a remarkably short period of time.

Frank Field

On that point, why was it innovative?

Robin Saunders

I just had not seen anyone do that sort of transaction. It was innovative to me, let’s put it that way.

Frank Field

Innovative in what way: the returns or in some other way, the legal structure through which all this operated?

Chair

Or the financial engineering to gear things up? What was going on?

Robin Saunders

I think it was a financial engineering transaction and at the time, I was more focused on financial engineering. As I got to know him through exploring the first transaction, which was aborted, in 1999, I was very impressed with his capabilities in running a retail operation and in structuring a transaction and then, after BHS was acquired as well, the level of detail in running the company, improving its margins and such.

Frank Field

Do you not think, Robin, you are downplaying your role? Although the bank in fact had to decide, they really decided on what you recommended. You were a trusted person by the bank, with huge resources, looking for investments.

Robin Saunders

Yes.

Frank Field

Presumably you recommended that this was somebody to back because you were impressed by these other matters. He then emerges on to the national stage, in my frame of reference. You were key for him. When did you last speak to him?

Robin Saunders

I have obviously spoken to him recently in the context of these proceedings but usually we do not speak more than a few times a year.

Frank Field

On the people who were interested in taking BHS off his hands, we have Paul Sutton, have we not, as one person, and we have Mr Chappell as well. Did you know Mr Chappell, however it is pronounced?

Robin Saunders

I do not know how it is pronounced and I do not know Mr Chappell. I had never heard of him until I read about it in the press in whenever it was, May 2015.

Frank Field

Thank you.

Richard Fuller

Ms Saunders, you have a very strong reputation in the City and I would like, in a minute, to ask you some more general questions about securitisation, but can I ask you some more precise questions, first of all? You mentioned an equity stake that you personally received at the time of the transaction. Approximately what was the value of that equity stake?

Robin Saunders

At which point?

Richard Fuller

When you were given it.

Robin Saunders

It was a highly leveraged transaction and I paid for that stake. Maybe it helps to put it in perspective.

Richard Fuller

Yes, please.

Robin Saunders

My group within WestLB did a number of similar transactions and we always bought equity in the companies that we “principal financed”. Principal finance for us was defined as a transaction where we would be lending more than a normal leveraged buyout. WestLB was participating in the equity upside of that acquisition.

Richard Fuller

Essentially you were like a GP in a sponsored PE fund.

Robin Saunders

Yes.

Richard Fuller

You mentioned you co-led it with Chris Coles at Barclays. Did Mr Coles get a similar opportunity to invest, as far as you are aware? Did he get that?

Robin Saunders

Barclays certainly did. I do not know if Mr Coles did.

Richard Fuller

You said you met with Paul Sutton in late January 2013, you did a desktop search and nothing came up. When were you aware that he was a convicted fraudster?

Robin Saunders

Again, I have been trying to refresh my memory on this because we never progressed to the stage of being engaged by anybody in this transaction. I think it was late June that we discovered that there were significant issues to be addressed. In any case, Sir Philip called me and said he was not going to be proceeding with Mr Sutton.

Richard Fuller

In December of 2012, a 25% stake in Topshop was acquired by Leonard Green.

Robin Saunders

Yes.

Richard Fuller

In your conversations with Philip Green, was that ever part of the decisions to sell interest in British Home Stores.

Robin Saunders

Not at all.

Richard Fuller

Can I ask you some questions about securitisation?

Robin Saunders

Sure.

Richard Fuller

You have built a reputation based upon the principle of buying cheap funds and sweating the assets, making company assets more productive and working effectively. What sorts of things are you looking for when you make those sorts of investments?

Robin Saunders

Even though the securitisation market, as was, does not exist today, we still look for similar assets—you will appreciate this—that are underpinned by real estate or intellectual property, which lend themselves to a predictable income stream. It does not always work out like that, obviously, but if you are starting from the perspective that the company has a portfolio of real estate or intellectual property or something that has attached to it an income stream, that income stream is put into a special purpose company and that income stream goes to pay the bondholders, who are looking for a better return than a government bond or a corporate bond. There is that little bit more complexity related to the income stream coming from an operating company that owns real estate into a special purpose company and on to the bondholders, and they demand a premium. The securitisation principaling crowd will always look for that, companies that are underpinned by those assets and a predictable income stream.

Richard Fuller

When you put lots of debt into companies like that and you sweat the assets, ultimately there is a return to the people who provided the debt but the super-return goes to those who have the equity in the business that sits under that debt.

Robin Saunders

Correct.

Richard Fuller

What is of interest to me is that if things go wrong then what is the difference, when you look back, between asset sweating and asset stripping? That is taking out resources from a company because you have put on too much leverage, put too much pressure on those predictable cash flows and are selling off assets. Can you give some comfort to people who now look back at British Home Stores and say, “It does not look like they were sweating the assets, it looks like they were taking out resources that were needed later on”?

Robin Saunders

I do not agree with that completely because the company, at least in my tenure there, was very profitable and could very easily service the debt that was put in place. For anybody who was paying attention to the financial markets at that time, it was very normal for a leveraged buyout to see leverage of seven, eight or nine times earnings before interest and taxes. That deal was much less. It was about six times interest before interest and taxes at the point of acquisition and by 2001, the profitability had improved so much the debt was worth two times earnings before interest and taxes. It was never the subject of asset stripping, definitely not. It was a very profitable company in the period between 2001 and 2004. I have not really tracked it, to be fair, since then.

Richard Fuller

Subsequently, obviously you will have seen from the news that the business got to a point where there was a substantial amount of annual losses, in the range of £60 million or £70 million per year. That beautiful period of profitability had transformed into a period of horrible losses. There was a mountain of deficit on the pension fund for the employees who had given good service to the company, caused by a variety of factors. Then, when you looked back to where the money would be to help with those things, the money was not there. What would you say to people who look at that and say, “It is all right, Ms Saunders, for your perspective on the year 2004 but ours goes all the way to now”?

Robin Saunders

That is an excellent question. It demonstrates a problem in the system, that pensions are run separately from corporate boards. There is a pension trustee committee to run pensions and there is a corporate board to run corporates and the two do not interact enough. As a common theme in corporate governance, they do not interact enough. You see it everywhere. Now we are starting to see the fallout from that. In relation to BHS in particular, I was not following the management and I was not in close contact with Sir Philip during that period but I will say that I am sure they were hurt like every other High Street retailer in 2008, 2009, 2010 and so on. They lost their way with regard to product offering to their target market and they probably lost their way on online marketing. It is unfortunate, for sure.

Frank Field

Maybe the directors seem to have lost the message but a large amount of money went out of this company. That did not seem to lose its way, did it?

Robin Saunders

How long should shareholders wait to benefit from distributable reserves? If we could reinvent the interaction between pension fund trustees and corporate boards, we would do that. I think we will see that going forward.

Frank Field

The model you were presenting is that somehow it is all going hunky dory and then people sort of lost their way. The one thing in this story that did not lose its way was the money. The money went to the Green family, did it not, from the whole group of companies? Richard has been talking about sweating a company. The sweating resulted in very substantial sums moving from a network of companies to Lady Green’s company.

Robin Saunders

Of course.

Frank Field

There was no losing the way there.

Robin Saunders

This is just my personal opinion, but do not think that paying dividends from a company that has large distributable reserves is the wrong thing. I do not think that is inappropriate.

Richard Fuller

Ms Saunders, you have a bigger responsibility than that given your role. Your role and your expertise is with unusually high amounts of leverage, putting unusually high amounts of strain on assets, which in good times can end up in a situation where there is money in distributable reserves and a decision could be made to take it out of the company. Then, later on, the company is threadbare. The quid pro quo of making super returns in periods where it is good and the sun is shining is that you are there to support the company when it is not in such good times, is it not, or does your responsibility just end when the going gets tough? Shareholders. I am sorry, I should not say “you”. I meant shareholders.

Robin Saunders

Can I put this in context with regard to my specific role in this scenario? The debt that was provided by my institution to British Home Stores was completely repaid in 2003.

Richard Fuller

I am talking from your point of view. You have built a reputation based on the provision of very large amounts of debt into companies. I am not asking about the responsibility between yourself and WestLB, which I understand clearly and which worked very well. My point is from your perspective on what you do to the companies. You made the point in response to Mr Field that at a time when things were going well, debt could be repaid and you could distribute money out of reserves. However, in scenarios like that, when the going gets tough it appears you feel that there is no responsibility on those who sweated the assets, took the money out and left the cupboard bare. I am trying to ask whether you think there is a responsibility that goes beyond the deal.

Robin Saunders

Of course. Anyone on a board is responsible for all stakeholders, the employees and everyone; all stakeholders. That is corporate governance. I was not on the board in a period when BHS was losing money and had a mounting pension deficit so I cannot opine. I did not have that information and I did not have that scenario myself.

Chair

When were you on the board?

Robin Saunders

From November 2000 to September 2003.

Chair

I am curious as to how I get a foot in the door at your office. You must get asked all the time. I tried to push you on this earlier on. As I recall, you said that Paul Sutton got in touch in about January and then you found about his background in June. I am still uncertain as to how he got in the door of your office, given his background. Does nobody Google anything in your office?

Robin Saunders

Yes, of course. We did and there were a couple of disputes that he was having with two businessmen in London but—

Chair

Nothing to flag up a major concern?

Robin Saunders

No, absolutely not. If we had known, I think we would have made different choices.

Jeremy Quin

Chairman, I should say that Robin and I have met in the past and I respect her professional capacities. Robin, how would you describe the corporate governance of BHS when you joined it?

Robin Saunders

I joined the board in November. The acquisition was made in May. I thought it was extremely professionally run.

Jeremy Quin

Was there a chairman, non-executive directors? How was it organised?

Robin Saunders

There was Allan Leighton, Terry Green, Sir Philip, myself, Chris Coles and two members of staff, Ian Alkins and Paul Coackley. I think that was the full board.

Jeremy Quin

How did that evolve over time? Clearly from your description the company is going well. Was there an informal aspect to the board deliberations? How would you characterise it?

Robin Saunders

I would say it was an extremely professionally run board.

Jeremy Quin

Thank you. You discussed the profitability in those years. What in your view was the magic that turned BHS around in that period and delivered that high degree of cash flow?

Robin Saunders

Primarily cost-cutting. Cost-cutting was a key driver. The joke was that everyone would have to use their pencils down to the nub before they could be thrown out. There were larger things. There were many suppliers of denim and they would be consolidated so that it was a cost-plus contract, things of that nature; a typical buyout improvement of operating performance.

Jeremy Quin

I appreciate that is an entirely legitimate way to enhance profitability but in your experience would you not say that that often gets to a situation where you take out a certain level of cost and that is not sustainable for the long term? You can take out a level of cost and there will be a step up in the profitability of the firm. First of all that, and then I do have a follow-on.

Robin Saunders

Is cost-cutting sustainable? Controlling cost is certainly sustainable. Then, of course, you are looking for revenue growth.

Jeremy Quin

There is cost-cutting ongoing and the benefit of that cost-cutting went out in the form of dividends and the early repayment of the WestLB loan. There may be concerns that the balance between investment in the business and the repayment of debt or the payment of dividends was inappropriate. Would you have any comments on that?

Robin Saunders

Not from my perspective.

Jeremy Quin

Understood. Just lastly, fairly shortly after you left the board there was a capital reconstruction. There was a large dividend payout at that stage. Was that being discussed as a natural progression or did that not really occur in boardroom discussions when you were still on the board?

Robin Saunders

I do not recall discussing that. I am sorry.

Jeremy Quin

That is very kind. Thank you very much, Robin.

Chair

Can I get your insight as to why you think there was no revenue growth in this period of, frankly, large consumer boom times, really?

Robin Saunders

I am sorry, I have not focused on that in the last couple of days but I would be delighted to have a look.

Chair

From recollection of the accounts, looking back from 2000, 2001, I think you are right in your analysis that costs were cut and supplier concessions were squeezed, but revenue growth essentially was flat. I am just wondering why that was the case at the time of a long-term consumer boom. BHS was a failure in that regard, was it not?

Robin Saunders

I apologise, I am not familiar—I remember there was some revenue growth. It was not huge but there was. I would have to refresh my memory. I apologise.

Chair

From your recollection, would this be the sort of thing you would be discussing on the board, why revenue growth may not be improving in the way some of your peers on the High Street would have been enjoying?

Robin Saunders

Yes, we would have discussed that.

Chair

What would have been the findings of that? Can you recall that?

Robin Saunders

I could talk to you all for days about that because I found it amazing how much detail was embedded in that management team about 100,000 purple jumpers. It was an incredible level of detail, to work on that very point of improving sales.

Chair

It did not, unfortunately, work. Thank you.

Richard Graham

Ms Saunders, can we go back to the year 2000 when you were involved in the takeover deal at BHS? At that time, you said that WestLB and yourself both had an equity stake in BHS. Is that correct?

Robin Saunders

Correct.

Richard Graham

You remained on the board until 2003. For how long did you remain a shareholder?

Robin Saunders

Until my shares were sold in 2009, along with the other non-Green family shareholders. I believe everyone sold at the same time in 2009.

Richard Graham

Thank you. We will come back to that in one second. WestLB were repaid the loan and, therefore, did not have a financial involvement themselves after 2003. Is that correct?

Robin Saunders

No, they also had warrants in BHS for having supplied that principal-styled financing at the acquisition.

Richard Graham

What happened to them? Did they convert into equity?

Robin Saunders

I assume they did but I parted company with WestLB and I do not know what they did with their stake.

Richard Graham

At that time, you said earlier that WestLB, which as far as I remember was certainly then a wholly owned Germany provincial government entity, was entirely relaxed about the fact that members of the principal finance unit had equity themselves in companies where you were arranging financial support of WestLB. Is that correct?

Robin Saunders

Yes.

Richard Graham

Then at some point during 2003 what happened between you and WestLB that you left the company?

Robin Saunders

In 2003 a transaction went sour and they had just committed quite a large sum of capital to my team. When that transaction went sour, unrelated to this of course, they decided not to be engaged in principal finance and I wanted to continue to be engaged in principal finance and I left the bank.

Richard Graham

That was to do with the refinancing in June 2002 of Boxclever, was it?

Robin Saunders

Yes.

Richard Graham

Did they fire you?

Robin Saunders

No.

Richard Graham

But they did not continue with the principal finance unit—

Robin Saunders

Correct.

Richard Graham

—because that had cost the bank, and therefore the state government, a large sum of money?

Robin Saunders

We can debate how much it cost them.

Richard Graham

But after that they never again engaged in principal finance where members of their team, their employees, were taking equity stakes in companies to which the provincial government was exposed by lending money. Correct?

Robin Saunders

I have no idea. I don’t know what their policy was thereafter.

Richard Graham

How would you react to the inference that your activities at Boxclever had damaged WestLB’s balance sheet and the provincial government’s reputation and that it was, therefore, essential for them to part company with both you and the principal finance unit?

Robin Saunders

I am sorry, can you repeat that?

Richard Graham

How would you respond to the inference that your activities at Boxclever had damaged WestLB’s balance sheet, and by implication the provincial government’s reputation, and that is why they decided to cease the principal finance unit and close it down?

Robin Saunders

I think that transaction led to the closure of that activity. Yes, I do.

Richard Graham

During the time you were a shareholder of BHS, as against when you were a director, of course was the time that the company’s situation changed from the relatively rosy situation that you have described from 2000 to 2003. In 2005 in particular the company issued a huge dividend and for the first time its assets turned from positive to negative on the balance sheet; they never recovered. How much did you receive in 2005 from the dividend?

Robin Saunders

I would need to check that.

Richard Graham

Is it true that in 2002 you received £1.75 million from dividends?

Robin Saunders

That sounds approximate—I had 0.5% of the company.

Richard Graham

In 2005 when the dividend was much greater than it was in 2002, you would, therefore, have received a much greater dividend.

Robin Saunders

0.5%.

Richard Graham

So, £3 million, £4 million perhaps? That was the year when the balance sheet effectively went negative for the first time. What did you feel about that? This was a company of some 11,000 workers and some 20,000 pensioners. Did you feel at that stage that the deal that you had put together was going sour while you were still benefiting as a shareholder?

Robin Saunders

I was not aware of that fact at the time and I do not recall having that discussion. I do not remember being told those facts. I had not been involved with the company since September 2003.

Richard Graham

What happened to your relationship with Philip Green during the period between you left as a director and when you introduced him to Mr Sutton?

Robin Saunders

We had limited contact in those years, apart from the sale of the shares in 2009, as I mentioned, but we would bump into each other at City functions.

Richard Graham

Who originated the search for people who might be interested in buying BHS? Was that your initiative or his request?

Robin Saunders

That discussion was really very casual. We were having a short catch-up and he mentioned casually that he would be looking for someone to buy BHS. I said casually, “I have met someone recently who might fit the bill. He allegedly has capital to do this. Would you like to meet him?” He said, “If he checks out, great, then let’s meet him”.

Richard Graham

What made you imagine that Mr Sutton was someone who would be appropriate to buy BHS?

Robin Saunders

I was under the impression that he had capital and enormous deal experience. He is quite a charismatic character and I had the impression he could do it.

Richard Graham

Did you know at that time that he had gone bankrupt in 1982 and spent a decade not being discharged because of non-compliance with insolvency rules and then in 2000 again he was made bankrupt in a French court over a property deal and that he left a trail of other people to whom he owed large sums of money as well?

Robin Saunders

Unfortunately none of that was in the public domain. When we did our initial desktop search about him and market soundings, we could find nothing about those two things, apart from two disputes that he was having with London property participants and that happens to many people in business. There were no alarm bells at that point and, as I mentioned earlier, had we moved to a formal engagement with him to consult, advise, we would have done a full legal check. The cost of that sort of check is about £100,000 and so we leave that to a stage when we are about to sign an engagement letter to provide our regulated services for that principal.

Richard Graham

Who else did you recommend to Philip Green?

Robin Saunders

No one.

Richard Graham

Purely Mr Sutton?

Robin Saunders

Yes.

Richard Graham

The eventually discharged bankrupt was the only person you recommended to him as an appropriate potential buyer of BHS?

Robin Saunders

I was not hired by Sir Philip to run an auction for BHS.

Richard Graham

It was your own initiative?

Robin Saunders

I was not hired by anyone. I simply made an introduction.

Amanda Milling

When you were looking at the potential sale of BHS to Paul Sutton, what were your observations of what was going to be required to turn this business around?

Robin Saunders

My personal observations? That is a good question. Capital and a management team with experience in a turnaround and, as I recall, Mr Sutton was bringing a management team from Switzerland and he had those people who were experts in turnarounds.

Chair

I am going to be incredibly rude and interrupt Amanda. I do apologise. I know that you have not done a great amount of work on this because you had not been tasked with finding and carrying out an auction, but you did not think that the existing management of BHS was a turnaround team?

Robin Saunders

I caught in the press as a casual observer that there were new people coming and going and I surmised that since the losses were continuing that that team were not able to turn it around.

Chair

Thank you. Sorry to interrupt, Amanda.

Amanda Milling

Picking up on the other point you made, which was about capital: how much capital did you think was needed to go into this?

Robin Saunders

I am looking at this purely from my own experience in business as opposed to this particular situation. If a company is losing tens of millions of pounds, things are going to have to change and an allocation of capital to either reduce the assets and/or increase marketing. There is myriad things that a management team can do to reverse the plight of a failing company. But I have never had a detailed look at BHS so I do not know what the extent of the problems were at the time. I just knew that it was losing quite a lot of money and it would need capital.

Amanda Milling

Did you think £55 million was going to be sufficient?

Robin Saunders

I don’t know the facts well enough to know what the number would be, to be fair, I am sorry. If we had done a thorough investigation I might be able to give you some more helpful feedback.

Craig Mackinlay

Just going back, Ms Saunders, when you sold the shares in 2009 there was the sale to Taveta 2 Investments. That was a creditors’ approval for a share reorganisation or the proceeds were satisfied by an issue of some shares to Taveta Investments. You did not get shares in Taveta, I assume. You were part of the cash side of that deal. Is that correct?

Robin Saunders

Correct.

Craig Mackinlay

£2.3 billion was the value of new shares issued, so your share of that would have been about £11.5 million. Is that about right?

Robin Saunders

No, no, definitely not.

Craig Mackinlay

Perhaps you can explain what your take on that was.

Robin Saunders

If I may, I would like to come back on the 2005 dividend. I have not looked at these numbers recently but I believe that my shares were sold for about £800,000, the 0.5%.

Craig Mackinlay

We saw this figure of £2.3 billion as the new shares issued, which would make the 100% worth £2.3 billion or 0.5% seems to me to be £11.5 million. I am not quite sure how that—did you look at that deal in any detail?

Robin Saunders

I did not.

Craig Mackinlay

Even though it was close to £1 million that you were going to receive out of this? There must have been a passing interest in £800,000 or £1 million or whatever landing in your bank account, or was it just too small fry to be worried about?

Robin Saunders

No, that is definitely not the case, but the shares that I held were non-voting and it was beneficial interest and shares held by Tina Green. I had absolutely zero negotiating power in relation to the value of the shares or anything, so it was a short conversation.

Craig Mackinlay

That is fine. Thank you.

Chair

Robin, in terms of the regular catch-ups that you might have with Sir Philip Green, whether it is over coffee or whatever, can you recall in the first half of 2014 did you have catch-ups with Sir Philip?

Robin Saunders

I may have run into him at a Sunday Times party or something but, no, I can’t remember any.

Chair

I am just curious. We have been told that Sir Philip arranged to meet Paul Sutton in May 2014. You said that it had come to an end in June 2013. I would have thought that would have been a good topic of conversation. Was it?

Robin Saunders

Yes.

Chair

That came up, did it?

Robin Saunders

I would like to be very clear on this point. Every time I saw Sir Philip after the phone call in late June 2013 he reminded me that he was not in contact with Paul Sutton.

Frank Field

Could I go back to that most recent conversation with Sir Philip, Robin? When was it?

Robin Saunders

I am sorry, which conversation?

Frank Field

You talked about a recent conversation with Sir Philip. When was it? How recent?

Robin Saunders

Today.

Frank Field

Today, right. Did you phone him or did he phone you?

Robin Saunders

I phoned him.

Frank Field

May I ask what did you talk about?

Robin Saunders

He said, “I understand that you are going to the Committee. Good luck”.

Frank Field

That was it?

Robin Saunders

Yes.

Frank Field

When was the conversation before? That was obviously the last one if it was today. When was the one before, Robin?

Robin Saunders

Several days ago.

Frank Field

Was it about these hearings?

Robin Saunders

Yes. I don’t know the person who bought BHS so I was not sure how helpful I could be, but hopefully it has been helpful to you.

Frank Field

Did he phone you or did you phone him on the second to last occasion?

Robin Saunders

Normally communicating with Sir Philip—which as I say is not very often but because of these proceedings we have been in touch more recently—he will phone on an unknown number, in which case I don’t normally answer unknown numbers.

Chair

Could you possibly drop us a line on that, in terms of the nature of what was said? We are going to have to go and vote, I am afraid. With your permission, colleagues, I am going to suspend the session for 15 minutes. Thank you very much for your evidence and, on behalf of the Committee, can I wish you a very happy birthday for tomorrow.

Robin Saunders

Thank you. Sitting suspended for a Division in the House. On resuming— Examination of Witnesses

Witnesses

Nicolas Giauque, Managing Member: London, Farallon Capital LLP, and Joseph Dryer, Capital Markets and Advisory, RiverRock, gave evidence.

Chair

The session is reconvened. Apologies for that, gentlemen. For the purpose of the record, do you mind telling us who you are and which organisation you represent?

Nicolas Giauque

I am Nicolas Giauque and I work for Farallon Capital Europe. We are the European arm of Farallon Capital, which is based in San Francisco. We have been around for 30 years and we are a fund management firm.

Joseph Dryer

My name is Joseph Dryer and I head up the advisory and capital markets group within RiverRock. RiverRock is an investment management firm based here in London, with offices in Paris and Milan. We primarily invest in mid cap corporates across Europe as well as in real estate. We have a broker-dealer licence here in the UK and obviously my investment banking business.

Chair

Joseph, may I start with you, although this is a question to both of you gentlemen? How did you come to work with Dominic Chappell, Swiss Rock?

Joseph Dryer

Dominic Chappell was introduced to us through a third-party consultant to RiverRock, Mr Lennart Henningson. My understanding is that Lennart had a longstanding personal relationship with Mr Chappell and he introduced us to Mr Chappell and to the opportunity that we, for a very short period of time—

Chair

What is his background?

Joseph Dryer

Lennart was not part of my group, he was a consultant to the RiverRock securities business, but my understanding is he had been a banker. He had done a number of transactions, raised capital, closed a few deals in Scandinavia. He was based and domiciled in Stockholm. Most of his business career was in Scandinavia with a few transactions done in Europe.

Chair

What did he say to you in relation to Dominic Chappell? What was the tone of the conversation? Did he say, “This is a person. We could do a good deal here”? What happened?

Joseph Dryer

When he was originally introduced to us, he vouched for him quite strongly, from both a professional and personal perspective. He was introduced to us that Mr Chappell was bringing a transaction that had been largely agreed with Sir Philip and that he was looking for an investment bank to advise him on the transaction and to help raise capital.

Chair

Did you push him on what “largely agreed” actually meant?

Joseph Dryer

Absolutely.

Chair

What was the status of it?

Joseph Dryer

The basis of our engagement with Mr Chappell, once he had cleared our KYC, was entirely upon the understanding and his assertion that a deal had been agreed between himself and Sir Philip. He advised not only us but his other advisers, and obviously his board, that the deal was that he would be acquiring BHS for £1, that it would be coming to him debt free and pension free, and that the pension liability would be completely covered prior to Swiss Rock’s acquisition of BHS.

Frank Field

Who would cover the pension liability?

Joseph Dryer

We understood that it was Sir Philip or coming from an area of Sir Philip. That was the transaction that was repeated to us on a regular basis.

Chair

To clarify, Dominic Chappell had said to you, “This is coming to me for £1. It is debt free and there is no pension scheme liability because Philip Green is handling this”?

Joseph Dryer

That is absolutely correct.

Chair

What sort of checks and due diligence did you do with regards to that? How far down the line did you go?

Joseph Dryer

We did our standard KYC. You are obviously asking were we aware of his previous bankruptcy. The answer is yes, but at the time he completed KYC and he was completely solvent. Upon our engagement, which was for a very brief period, along with the engagement of other internationally recognised advisers—which was a precondition of RiverRock being engaged, that there would be leading recognised international advisers on both sides—we were advised that Linklaters would be acting for Sir Philip and that Goldman Sachs would be acting for Sir Philip. Then in the period that we were engaged we embarked on a verification and validation exercise to establish that the deal as it had been presented to us was valid. Our role as an adviser would be to advise him on executing the transaction and raising capital for the transaction.

Frank Field

Did you ring Sir Philip and say, “Are you covering the pension?”

Joseph Dryer

No.

Chair

How credible did Dominic Chappell sound? This was a man who had no retail experience whatsoever. Was that not a risk for you?

Joseph Dryer

We were aware of his weaknesses in his retail experience, the lack of any senior retail team. However, he led us to believe that once our proposal had been accepted and we entered into a period of 120 days of exclusivity, that he would be addressing that issue by looking to identify a very relevant and senior team of retail executives with a track record of running large retail organisations.

Chair

Was that existing BHS management or was that a whole new team?

Joseph Dryer

Clearly a key element was retention, retaining key BHS management, but what the firm needed was a new CEO to come in here and reshape the business.

Richard Fuller

Nicolas, can I ask you similar sort of questions? Can you explain how Farallon Capital got involved with this particular transaction with Arcadia?

Nicolas Giauque

Absolutely. Maybe I should say straight off the bat that there were two transactions for us, or two potential approaches that were made by Dominic Chappell to us. One was with regards to providing working capital for the acquisition and the subsequent one in May, June was providing working capital at that time. The initial introduction came from an adviser who we mutually knew and it was a simple, “I know somebody who is interested in putting something together” and that adviser did not get involved any further. That is the genesis of the transaction, the review that we did. The second time around, again he called us and asked if we were interested.

Frank Field

What was the name of the adviser?

Nicolas Giauque

The name of the adviser was Mark Vickers at Merlin Partners, but I must stress that to our knowledge he was not representing us or representing anybody else and really his involvement was just one phone call.

Richard Fuller

That was the phone call that put you in touch with Dominic Chappell?

Nicolas Giauque

Yes.

Richard Fuller

What was the nature of the original ask of Dominic Chappell? Did he say, “I need £500 million to do a transaction”? Was it, “I am interested in buying British Home Stores. How much do I need?” What was the nature of his initial inquiries with you?

Nicolas Giauque

I thought that it was more of an evaluative process of how much would he need to fund the business and it was somewhere around £120 million. We had discussions over a period of time on and off to determine whether that was something that we could provide and whether that was what he genuinely needed.

Richard Fuller

Who came up with the number of £120 million, you or him?

Nicolas Giauque

I believe that came from him.

Richard Fuller

At some stage he hired advisers, Grant Thornton. I am not sure if that was before or after the transaction, from recollection. Did you ever see a business plan that had that on it?

Nicolas Giauque

We saw a very initial business plan that I think had been prepared by the BHS management team. I think Dominic Chappell retained Grant Thornton to audit that business plan and the financials and we never saw the output of Grant Thornton because our involvement became null and void at a very early stage in the process.

Richard Fuller

That number of £120 million did not come from you? It came from Dominic Chappell?

Nicolas Giauque

Correct, yes.

Richard Fuller

How far did you get in saying, “Yes, we can provide you with that”?

Nicolas Giauque

I think this is the crux of the question. Certainly in that first instance we provided Dominic Chappell with an expression of interest.

Richard Fuller

Is that a formal letter?

Nicolas Giauque

Technically it was a non-binding term sheet that was conditional on the wide variety of things that you would see. The key three points that I would raise are it was conditional on investment committee approval on our side, it was conditional on due diligence and it had a special condition on pension. The special condition on pension was satisfactory resolution and consent by the Pensions Regulator with regards to the BHS pension issue. That was straight off the bat, very upfront, what we were seeking to achieve.

Richard Fuller

In a very short period of time you recognised that one of the principal conditions of you providing money was that there was explicit signoff from the Pensions Regulator?

Nicolas Giauque

Yes, absolutely.

Richard Fuller

Did you get any way in terms of checking whether any of those conditions had been fulfilled?

Nicolas Giauque

We had these initial discussions and initial exchange of documents in early February. At that point in time we had identified who would be our pension advisers. We are not specialists in this matter so we were going to want to review it. Part of the issue that we had was that in order for us to push forward with our due diligence and our work, we wanted to have an exclusivity agreement and a third party fee coverage. That letter was never signed so within our process, if you think about it, we spent a bunch of time trying to figure out exactly what the borrower wants, see whether we can deliver what he needs. Then at that time we identified this sort of agreement to work together to get to something, that is this term sheet, and then we would do our due diligence, but we never got past that stage here.

Richard Fuller

Just to help us, you are talking about a non-binding term sheet. Was that at the beginning of the process or at the end of the process? When was that?

Nicolas Giauque

The non-binding term sheet was on 5 February.

Richard Fuller

When did you first have your discussions with Mr Chappell?

Nicolas Giauque

The first discussions were probably end of October 2014. I think we signed a NDA on 3 November or 4 November 2014, but it felt like there was a crystallisation of an agreement with the seller some time around January, February. I should say a broad agreement.

Richard Fuller

By 5 February you had a non-binding term sheet that you had submitted to him.

Nicolas Giauque

Correct.

Richard Fuller

At that point does that mean, “Yes, I am going to provide the money”?

Nicolas Giauque

No, it does not in way, shape or form.

Richard Fuller

Can I take it to the bank and put it in my bank account?

Nicolas Giauque

I think you would be hard pressed to achieve that because—

Richard Fuller

Can I represent that I have the money to other people?

Nicolas Giauque

I am not in other people’s minds but if I received that on my end and I was the recipient of that, it is subject to investment committee, it is subject to due diligence, and those are subjective decisions on the other side. In no way is that a commitment and I do not think anybody in the City would consider that to be a commitment. It is not considered for that to be a commitment.

Richard Fuller

To be clear, Farallon Capital’s willingness to provide money never went beyond that stage? You never did your due diligence, you never got investment committee approval, you never got a note from the Pensions Regulator?

Nicolas Giauque

Of course not. It was never even raised. I am a member of the global investment committee but I never raised it with my members because I thought this was very early on. How many non-binding term sheets of this kind conclude to a final deal? Maybe one in five. The expression in the business is you have to kiss a lot of frogs.

Richard Fuller

Yes, I have heard that phrase. In the evidence that Paul Budge, the CFO of Arcadia. provided to the Committee, he said, “He gave his observations”. I think that was relating to Mr Gutman from Goldman Sachs. “As far as we were concerned, the observations were that they—by which he meant Mr Chappell, Swiss Rock—had ability proof that they had lines of funding for £120 million through Farallon. That was very important.” How would you characterise that observation from Mr Budge?

Nicolas Giauque

It was factually incorrect. There was no committed financing available to anybody. We were very far away from a situation where we could have. I think that the testimony from Goldman Sachs supports this assertion. The paper trail, the exchange of documents are very clear here. We are talking about term sheets, draft letters, always mention non-binding, investment committee; we had the pension condition. It was very clear that in no way was this committed financing and I think the appreciation from Goldman is very much in the same line. They use initial; we use non-binding. It is very coherent, so I do not think there is any support for that in fact.

Richard Fuller

You are expressing quite an amount of hesitation about whether that money was really there from your own point of view and seeing as it was coming from you I think I would take a lot of credence to that. As you also mentioned, Goldman Sachs were providing their own independent observations, as they call them, to Arcadia. I think the catalogue of calls is in the public domain, is it? Yes. On 3 February there was a call from Mr Gutman to Sir Philip Green where Mr Gutman informs Sir Philip Green that, “While Farallon appears a credible financing provider—good for you—it had not conducted due diligence and there was risk attaching to the Swiss Rock proposal”. That was on 3 February even prior to your non-binding term sheet. But then after your non-binding term sheet, there was an e-mail from Mr Gutman to Paul Budge indicating that, “He was happy but Farallon’s initial funding proposals were subject to due diligence, documentation, et cetera”. Why is it that Mr Budge would then say to us that he had ability proof that they had lines of funding for £120 million?

Nicolas Giauque

These are people’s opinions.

Richard Fuller

I guess what I am trying to say is that that, to my ears, sounds like it is a more confident assertion that money is there than would have been in your mind at that stage.

Nicolas Giauque

Yes. The only conversation we had with Goldman—and our records at least on that point are completely complementary—was one conference call on 3 February. Goldman, to the best of my knowledge, would not have received any further information. Then we exchanged documents—actually we did not exchange documents. We offered a non-binding expression of interest to Dominic Chappell and all the documents that we exchanged at that time with Dominic Chappell, which were never countersigned so we never moved to the next stage, were all about non-binding and investment committee.

Richard Fuller

What sort of things was the £120 million financing anticipated being used for? Did you have discussions with Mr Chappell about what that money would be used for?

Nicolas Giauque

It would have been used to fund the working capital of the business.

Richard Fuller

Would that include taking money out of the company for his own personal use?

Nicolas Giauque

No, absolutely not. It was just to fund the working capital of the business. It was a big business and it needed access to funding lines to pay for supplies and so on. It was not meant to be able to withdraw it. It was described and it was used in the business plan that the use of the funds was about funding the business.

Richard Fuller

Did Farallon Capital make an assessment of whether that was sufficient, even a cursory assessment? When you put your non-binding term sheet, had you worked out whether that would be sufficient to turn the business around?

Nicolas Giauque

At that stage we had looked at a business plan. It was a very cursory glance. We would have only gone into reviewing that in the due diligence process.

Richard Fuller

I am not quite sure whether that means yes, we did look at it and it seemed like it was enough or we did not really think about it.

Nicolas Giauque

There was a business plan that was supported by this line, yes. Whether that business plan made sense or not, that is something that we would have done afterwards.

Richard Fuller

It was very preliminary. When did you terminate your engagement?

Nicolas Giauque

In that first phase there was no formal termination in the sense that it never got past that very early stage discussion because there was no agreement on covering our due diligence so we never conducted full due diligence. Then we learned on 12 March that the business was sold by Sir Philip Green to Dominic Chappell.

Richard Fuller

Your last engagement was a phone call with Goldman Sachs, was it, to advise them?

Nicolas Giauque

No, because subsequent to that we sent a term sheet and then we had back and forth as to this fee coverage letter, “Do you want to sign it? Why don’t you want to give us exclusivity?” There was this back and forth but no progress was made in approving. What I am trying to say is that we were no closer to being in a position to analyse or make a decision on financing on 9 March than we were on 5 February.

Richard Fuller

I am just trying to work out when you had your last conversation with anyone connected with this transaction. Maybe you said and I missed it.