Posted: 28/06/2016
Sir Philip Green needs no introduction. Tensions were running high and it is already well publicised that his appearance before the committees resulted in difficult exchanges, particularly between him, Richard Fuller and Iain Wright, both of the business innovation and skills select committee and with Richard Graham of the work and pensions select committee. This was interesting bearing in mind that Sir Philip's initial reluctance to appear was driven by earlier comments made by Frank Field, the chairman of the work and pensions select committee.
The first line of questioning involved BHS’s dividend policy. Sir Philip said that, in the early 2000s, BHS was conservatively run having debt of one times its cash flow, compared to other businesses which could have up to three times cash flow. It was pointed out to him that, in the periods 2000 to 2004, the dividends paid were 19,738% of profit compared to 84% at M&S and 80% at Primark. Sir Philip questioned the relevance of this comparison.
Pressed again - and with the benefit of hindsight - he was asked how he viewed that dividend policy. Did he consider it prudent compared to other companies and, if he did think it was prudent, looking back, how prudent was it? He maintained that the figures were not excessive based on bank debt versus earnings.
When questioned about the sale of properties out of BHS to Carmen Properties Limited (a family company) he said that this was a normal sale and leaseback transaction. The valuation was carried out by Savills and 100% of the funds (circa £106 million) went back into BHS. He was not certain why the sale and leaseback was done, as this was some 14 years ago, but it was not an abnormal transaction and very common. Despite these transactions being common, he was probed as to why it was a good idea for BHS. The Committees were clearly trying to focus on the fact that the offshore-registered Carmen avoided paying tax on £152 million rental extracted.
Sir Philip was at pains to point out that tax is paid on all UK-based holdings. This was accepted by the committees but he was asked how transparent the wider group actually was given the number of holdings in Monaco, Jersey and so on. He did not consider it to be a complex structure and was irritated at what he regarded as an insinuation of tax avoidance. When asked if he would allow all accounts to be made available to The Pensions’ Regulator (TPR), he said he had no control over the Green accounts, his wife did.
He was also asked why the back office costs of BHS were £36.3 million before the transfer to Arcadia and then went up to £57.7 million, although the move was designed to save money. He said that the committees will not find that any profit was made by Arcadia in respect of any third party charges to BHS.
Sir Philip was then asked when he actually started to think about selling BHS. He said this was in 2014. He outlined that, although the committees' focus was on the period 2000-2004, £254 million of capital was invested in the stores between 2004 and 2009, and a further £256 million was invested on an unsecured interest free basis together with £100 million of capital under Arcadia from 2009. As part of the sale to Retail Acquisitions, he said that there was some £80 million in cash and £100 million of unencumbered assets.
Sir Philip confirmed that Traveta is still paying Lady Green for the BHS sale. The committees highlighted that she receives £20 million a year and the last accounts show that £108 million is still to be paid. Sir Philip said that he did not know if that was correct as he does not sign off the accounts but he was reminded that, as a director, he would still, of course, have to approve them.
The session then moved on to pensions. Under his stewardship of BHS and when Margaret Downes was chair of the trustees he said there was very little two way communication. In 2000 the scheme had a surplus of £43 million. The surplus then moved to a £7 million deficit by 2006 and it appears that there was an employer contribution holiday.
Apparently, in late 2005, Margaret Downes made representations by letter for BHS to support the scheme. Sir Philip said he did not know about this and did not know what was happening with the deficit until conservations took place regarding the 2012 valuation which resulted in the 23 year recovery plan. He said he was virtually unable to answer any questions about the scheme between 2000 and 2012.
He was asked about the 23 year recovery plan and the £10 million per annum deficit repair contributions. Was this figure calculated to reflect the deficit or was the figure entirely driven by affordability? No response was noted.
In 2009, the scheme was closed to accrual. This is a common exercise for liability management and one that most DB schemes have undertaken. It does seem odd that, even at this stage, Sir Philip had no knowledge about what was going on with the scheme, as these exercises are driven by employers and not trustees.
Sir Philip was then reminded of a meeting he had with the then Pensions Minister, Steve Webb, in 2012 when he assured the Minister that there was “no risk” of the scheme falling into the Pensions Protection Fund (PPF) and funds would be found from elsewhere. When asked if this is correct, Sir Philip said that the conversation was about the increase in the PPF levy from circa £200,000 to £3 million. He wanted to know why the additional £3 million or so could not go directly into the scheme, raising the deficit contributions from £10 million to £13 million.
Sir Philip said he could not recall making the pension promise that had just been suggested to him. Steve Webb said he did. Under intense questioning, Sir Philip said that Richard Graham was trying to force him to give answers that he (Richard Graham) wanted and he would not do so. Sir Philip turned to the chair, Frank Field, and said that he wanted to answer questions on the pension scheme instead of being beaten up by Richard Graham. A lively and intense moment during the session!
When asked about Project Thor and what the underlying motivation was from his point of view, Sir Philip said that Deloitte had recommended that a project like Thor would give a better solution then entry to the PPF. Deloitte was asked to develop the plan and then discussed it with Chris Martin (Margaret Downes’ successor as chair of the trustees). In mid 2014, contact was made with TPR and he recalls that TPR did not reject it immediately but they did take a very long time to respond. It then went back and forth. It was suspended because it was felt to be, rightly or wrongly, the wrong moment to try to get a landlord and supply discount which was needed for Thor to work. There was a debate and TPR asked for it to be withdrawn, although Sir Philip’s advisers asked for it to be paused. It was eventually picked up again in January 2015.
Sir Philip then recited a recent letter from Chris Martin to him in which Chris Martin states that the trustees continue to be committed to considering a proposal to deliver benefits above PPF levels. He told the committees that Malcolm Weir of PPF continues to give encouraging signs that a proposal like Thor could be a solution and that he was happy to advance it. Malcolm Weir went to their office on several occasions and the head of PPF and TPR were due to meet the day after his last visit. That was the last they ever heard.
Sir Philip said that Lesley Titcomb, the Chief Executive of TPR, had told the committees that TPR had been looking at BHS since 2013 but at no time did she contact them to ask for a meeting. Sir Philip said he attempted to contact the new Pensions Minister, Baroness Altmann, and was told “my team have told me not to interfere”.
They did get one joint meeting with TPR and PPF in March 2015. Since then it has gone nowhere until a week before Sir Philip's appearance, when TPR phoned saying that they wanted to have a meeting. Sir Philip turned to Frank Field and said: “Mr Field, maybe you have been instrumental in waking them up?” Since then there has been a dialogue between TPR and Arcadia’s advisers but not with Lesley Titcomb.
Sir Philip is still talking to Malcolm Weir of PPF and told the committees that it is resolvable and sortable. He wanted to give an assurance to the 20,000 pensioners and said: “I am there to sort this in the correct way”. A Deloitte team is working on the latest version of Thor. Sir Philip said: “I can give you the comfort of saying that we are working on it and post this, to ASAP get all the relevant people in the room as they are now willing to engage and see if we can find a solution.”
During the questioning, the committees highlighted that Project Thor was paused just one day after TPR had outlined to Arcadia, BHS and advisers that it needed more information on management charges; the sale and leaseback arrangements; property; and dividends going back to 2000. Paul Budge had told the trustees on 5 September 2014 that Sir Philip had advised him to pause or freeze Project Thor for three months until after the Christmas peak in order to consider his options.
The reasons cited were economic uncertainty, political uncertainty and the Christmas peak trading period. Sir Philip was asked if these sounded like the reasons he gave. Sir Philip said that the principal reason was that the back quarter was the time when BHS made its money and it was the wrong moment to go to the landlords and suppliers. He said that he was not influenced in that decision by moral hazard questions raised by TPR and the fact that the timing with the withdrawal of Project Thor was purely coincidental.
It was highlighted that, according to Chris Martin’s records, Sir Philip said directly to him that he felt that he was being tortured by TPR and it was “trawling through bull …. from ten years ago”. Richard Graham said that this suggested that Sir Philip was not very comfortable with the regulator looking at moral hazard.
In 2014, Sir Philip confirmed that Arcadia had three options for BHS:
Pressed on the revelation from Lord Grabiner in his session that he was not sent papers for the board meeting dealing with the sale of BHS, Sir Philip appeared to wriggle around giving an answer but he eventually said that there was no specific reason that he was not in the loop. Reading between the lines it looks like this relationship is on a knife edge.
Asked if Sir Philip had spoken to other potential buyers, he said yes, sarcastically saying that Chappell was ‘the lucky man’. The others had gone nowhere because they had been talking about a pre-pack or administration. He told the committees that it was not correct that Chappell was under the impression that the sale would be without pensions despite the committees stating that documentary evidence suggests this is exactly the basis upon which Chappell was working.
The committees referred to a phone call that Sir Philip had with Chris Martin the day after the sale. Chris Martin had provided a copy of that telephone note and Sir Philip was said to say that he (Chris Martin) had potentially jeopardised the sale by telling the purchaser that contributions might increase to £30 million per annum.
In terms of Paul Sutton, Sir Philip said that an anonymous file arrived full of information indicating that “you should not deal with this guy”, so he called Paul Budge and told him to disengage with him. He also told Budge not to talk to Chappell until he had been cleared by Goldman Sachs. When it became apparent that there was a connection between Sutton and Chappell, some action was taken to seek some form of undertaking from Chappell.
He said that around 90 emails or so had flowed between the relevant parties before Anthony Gutman of Goldman Sachs wrote to Chappell saying “Congratulations. You deserve it. You were consistent throughout and stuck to your word”. “This is hardly someone telling us not to deal with the guy, is it?” said Sir Philip. Sir Philip went on to confirm that the brief was simple: he was happy to see Chappell when he was cleared and there was enough evidence that he could perform, bring some money or do something.
The discussion around Sir Philip’s relationship with Chappell continued. He said that the fact that Chappell had Grant Thornton and Olswang, two respected firms, as his advisers gave him credibility to move forward. They were, he said, “very aggressive with detail and were all over it”. Grant Thornton lived in their office for nearly four weeks. He told the committees that Grant Thornton and Olswang ended up getting over £8 million in fees and BHS appears to have paid them.
What made Sir Philip think that Chappell, a new guy to retail, could do what he as “King of Retail” could not? He said he did not, on a personal basis, but this was a form of management buy out/buy in. Chappell turned up with credible people. “He could have turned up with the Archangel Gabriel, you still did the deal with him,” said Jeremy Quinn of the work and pensions committee.
Sir Philip was asked whether he was ever challenged by anyone about the sale to Chappell and again he mentioned the army of people who gave Chappell credibility. He said to the committees: “Would I do that deal again? No. Are we sorry that we did it? Yes”. Further, Sir Philip questioned the previous relationship that Olswang and Grant Thornton had with Chappell and whether or not they have any accountability or responsibility. The committees said that this was a question that was being looked at.
The questioning then turned to the balance sheet. At completion there would have been £96 million in cash and £25 million net cash available from HSBC. £35 million was in the Olswang client account and Chris Harris had told the committees in an earlier session that Arcadia considered this important for Chappell’s credibility. Was this actually the case? Sir Philip confirmed that he had no knowledge of where that money came from and he wanted them to know that it did not come from Green or Arcadia. The purpose of the money was to sell Marylebone House to Chappell. He knew that the intention was to turn it in to £45 million on re-sale.
Sir Philip was then asked why £8.5 million was still in the BHS cash facilities as proceeds of sale of Marylebone House? Why did he change his mind to sell Marylebone House to Chappell? It seems that the sale was leaked and other offers started to turn up. Marylebone House was owned by a company called Wilton. There was a lease between BHS and Carmen. When Carmen was sold back to BHS for £70 million, the lease on Marylebone House was broken to give them two years rent free and surrender to Wilton (registered in the British Virgin Islands), the beneficiary of which is Lady Green. Wilton was sold to Traveta Investments in July 2015 and bought by Arcadia for £53 million.
So was £8.5 million paid to BHS or to Retail Acquisitions? He confirmed it was paid to BHS plus another £1.5 million to sweep up other items under the Sale and Purchase Agreement. This is where we get the figure of £10 million. Readers will recall that this was paid in June 2015.
Probed again about BHS’s cash position, Sir Philip said that they believed (presumably Arcadia) that there was £94 million plus the unencumbered assets of plus/minus £100 million. Readers will note that this differs by £14 million on the figure given by Sir Philip earlier in this session.
The building next door to Marylebone House (North West House) was sold for £32 million and, based upon the covenants in the Sale and Purchase Agreement which Sir Philip read out to the Committees, this should have gone back into the BHS account, but only £25 million arrived. The remainder was apparently put with the Bank of China as a deposit to gain a facility of £60 million/£80 million. When Arcadia (which was running the back office for BHS) enquired about the missing £7 million, it was given this explanation. The £7 million never materialised and neither did the Bank of China facility. Only when BHS went into administration did it appear that it remained in Olswang’s client account and had been used to pay £1.2 million to Olswang; £1.2 million to Grant Thornton; £1.8 million to Chappell; and loans plus interest payments and several hundred thousand pounds to other individuals who the committees have already seen. Sir Philip said it was a blatant breach of covenant.
Asked about his motive for taking the £25 million floating charge over the non-property assets of BHS to make him a preferred creditor on insolvency, Sir Philip initially could not agree about this but eventually he said that there was a floating charge even if he did not agree the specific details of the one to which the committees referred. He made no comment about any motive.
Sir Philip said Chappell was stubborn when he came to do the property CVA. He said that, if it had been done in June 2014, it would have taken out £35 million/£40 million in rent. In his words, it would have been “job done”. Asked if he knew about the Ealing property transaction where the sale to his stepson had resulted in a flip on for profit of £3.5 million, he said he was not involved. He also told the committees that he had no idea what Chappell was talking about in his session when he said that this transaction was being investigated by TPR.
The discussion then turned to the actual administration. Chappell had told the committees that Sir Philip had £35 million of cash in BHS and wanted it back, hence leading to the administration. Sir Philip said that he attended a meeting at Olswang on 22 April when they were told of a last minute rescue attempt by an unconnected retailer. He was not told who this retailer was. Sir Philip told the committees that he advised Chappell that he had to give this every effort but they had some concerns, namely:
In order to mitigate these concerns, Arcadia suggested that it should issue demands that, if necessary, it could appoint administrators under its floating charge should any undue delay occur in resolving the current financial position. He said the administrator provided a letter as back up so that, in case whatever Retail Acquisitions or anyone was doing did not happen, the administrator would be able to do his job on the Monday because of the winding up and the things that the committees have heard.
The committees then read a paragraph from a letter they had received from Mike Ashley of Sports Direct which effectively said that Sir Philip did not attend the meeting at Olswang on 21/22 April but he was in telephone contact with Sir Philip over the weekend. A subsequent meeting then took place at the offices of Arcadia on 27 April.
Sir Philip then got rather angry with Iain Wright because he felt that he was being misled. He said: “I am in control of what I say” and Iain Wright responded: “You really are not in control”.
Sir Philip then confirmed that, unbeknownst to him, and finding out subsequently, Chappell had made contact with Sports Direct on Thursday. He made contact after he had signed up for BHS to go into administration. Sir Philip said he had ‘zero knowledge’ that that meeting had been arranged. He said that anyone in his building would be able to confirm that he was not involved.
After this meeting, apparently lasting all night, Chappell contacted Sir Philip around lunchtime on the Friday saying “Could I have Mike Ashley’s phone number?” He asked why and was told that Chappell needed to talk to him. Sir Philip asked about what and was told “I have signed”. Apparently calls were made to Mike Ashley who then called Sir Philip around three o’clock laughing and said: “You knew it was me, didn’t you?” He confirmed that they are friends and said: "How would I know if I was asleep while they were doing all the work?"
Sir Philip asked Mike Ashley where they had got to and in response he said: “Do me a favour, please make sure that guy doesn’t phone me again”. Sir Philip apparently said: “It is not my fault. You started the dialogue”.
Sir Philip wanted to place on the record that he had no engagement in the terms of the Sports Direct deal with Retail Acquisitions although he has now got some information on it obtained for his attendance before the committees. Probed again about how many times he spoke with Mike Ashley over the weekend, he said two or three and Iain Wright wanted to know whether or not those conversations were about the deal. Sir Philip said: “It got stuck”. He was not involved in the detail. “We had a call with Mike Ashley who was running the deal.” He denied that the nature of that conversation was: “Look, Phil, it’s stuck, give us a hand, try to unblock it”.
Sir Philip was then asked why he was at the meeting on 27 April at Arcadia’s office. He confirmed that this was because Arcadia was the principal secure creditor, so it offered to host the meeting. He then was given the opportunity to read out what happened at that meeting extracted from two letters that Sir Philip had received from the administrator.
When asked what eventually blocked the deal between Sports Direct and BHS, Sir Philip Green waved a chequebook in the air. It transpires that Sports Direct had deposited £35 million into their lawyer’s account to show that they were a credible buyer. Iain Wright considered that this showed that they just wanted a bit more time and that Sir Philip (Arcadia) did nothing to stop the administration process to ensure that Sports Direct could be given more time to consider this.
He asked the committees on what possible basis would he want to stop somebody buying it if they would rescue it. Iain Wright said “ego”. Iain Wright continued saying: “You could not make a success of it and you did not want another retail billionaire to do the same”.
Sir Philip went to say that on the deal the administrator offered on the Thursday, he actually thought: “Shall I buy it back myself?” but then thought there would be so much uproar that he better not. He went on to say: “I can assure you and I give a guarantee – a personal guarantee – I wanted that deal to happen”. Asked if Sir Philip were to get the pensions issue settled, might he buy BHS back? He said no.
The session ended with Sir Philip agreeing to provide a commitment that he is planning “ASAP to sit down with TPR”. He has a team working on it, and he wants to get this over with, saying “trust me, sooner than you do”. He said he was not running away and is going to give his best shot to find a solution as quickly as they can. If anyone now turns up who wants to buy BHS, Sir Philip provided his commitment that they will support anybody and be helpful in making that happen.
It is difficult to glean an enormous amount from the session in terms of Sir Philip’s knowledge about the pensions deficit but no doubt that this is what TPR has been probing. It does seem inconceivable that he would not have known about it and, regardless of the way in which the overall group is set up, he did and does call the shots. He does ultimately have the responsibility for doing the BHS deal which resulted in some £20 million a year (with £108 million still due) being paid to Lady Green and the further cream on top such as the proceeds from the sale of Carmen Properties. Can Sir Philip Green seriously think he will be able to hide behind offshore accounts of which his wife is the main beneficiary?
We hope that Sir Philip is a man of his word and stands behind the ‘personal guarantees’ he has now given. Lesley Titcomb of TPR is reappearing on 28 June and it will be interesting to hear what she has to say about the current engagement between Arcadia and TPR.
The committees have now indicated that they would like Lady Green to give evidence. So far, Lady Green has hidden behind her husband and rarely leaves their yacht in Monaco. The committees have written to her asking for further details of the complex web of private businesses owned by the Green family and seeking an explanation of Sir Philip’s role in their operation.
In the meantime, further sessions take place this week, with call backs for a number of key witnesses, including Anthony Gutman of Goldman Sachs; and Paul Budge, FD of Arcadia. We will also hear for the first time from Paul Sutton, the mastermind of Project Albion and the individual who effectively introduced Chappell to BHS.
Readers should note that this is a brief and selective summary of the session on 15 June 2016.
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