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Early sales yield huge profits

01 Apr 1998

WHATEVER the ultimate outcome of privatisation in Britain, fortunes are being made by institutions and individuals - and especially by former British Rail managers who risked their own savings - as the original companies are sold on.

March 6 saw bus operator FirstGroup agree terms to buy the 74·7% of equity owned by its fellow shareholders in Great Western Holdings for £111m; the deal required approval by FirstGroup shareholders on March 30. The only significant assets which GWH owns are franchises to operate Great Western Trains and North Western Trains for a further 8 and 6 years respectively. GWH shareholders paid £1·5m in 1995 for equity which last month's deal valued at £140m. As a result, British Rail employees who won the franchise in a buy-out hit the jackpot. GWH Chief Executive Brian Scott receives £3·7m for a personal investment of £50400, and 1600 railwaymen who paid £400 each get £29600.

This startling 74-fold increase was topped by MEBOs which acquired two of BR's three rolling stock companies. The National Audit Office showed last month in a highly critical report that the Department of Transport sold the Roscos in November 1995 for almost £1bn less than they might have fetched a year later, when the removal of uncertainties surrounding rail privatisation would have encouraged major leasing companies to bid.

David Davies MP, Chairman of the powerful Committee of Public Accounts, noted that the management and employees of Porterbrook and Eversholt received £279 and £143 respectively for every £1 they invested in equity when the companies were sold on within 12 months. Davies criticised the DoT severely for failing to claw back excess profits on any subsequent sale.

The principal reason why bids for the Roscos in 1995 were some £900m lower than the sell-on prices a year later, says NAO, was that 'bidders were attributing little value to potential rental income after the initial lease contracts had expired', whereas the DoT had valued rentals from future leases at £500m. NAO also discovered that bidders were predicting maintenance costs and overheads already known by DoT to be pessimistic.

Gross proceeds of the original sales completed early in 1996 amounted to £1·8bn. All three companies were sold on between August 1996 and December 1997, increasing their equity values by 56%, 40% and 58% in 8, 12 and 23 months, and yielding a total increase of some £900m. Had the sales been delayed, the government could also have retained some £300m of lease income which was supposed to be spent on new trains but was not. o