Report of the Deputy Chief Executive (Place)
The Cabinet considered a report of the Deputy Chief Executive (Place) which set out proposals for the acquisition of a commercial asset.
A corresponding private report was also submitted to the meeting setting out the commercially confidential matters of the proposals. (Minute 91 below refers.)
The report indicated that officers had been exploring the commercial and financial viability of acquiring a commercial asset. The Council had entered into an exclusivity and confidentiality agreement to undertake due diligence to assess the commercial opportunities and business risks associated with acquiring the business.
The proposed acquisition presented several opportunities to add value to an internal service that could only be delivered from acquiring these shares. The current owners had expressed a preference to complete the transaction by the end of the financial year (10th March 2020). The estimated acquisition price would be adjusted for net debt within the business and working capital. The final value would not be known until the legal documents had been agreed and due diligence completed on the management accounts for the current financial year.
A share acquisition could only be financed over a maximum period of 20 years, which meant the capital financing costs for the business were higher than if it had been possible to spread this over a longer term. The current profit (2018/19 for group) was sufficient to service this level of investment costs and deliver dividends that could be attributed to the medium term financial strategy. Based on this performance, it would be possible to extract dividends over and above the capital financing costs without jeopardising the day to day operation of the business. There had been growth for the current financial year, which had shown an increase in profit for the first 6 months of the year (April to September 2019), strengthening this financial position.
As part of the due diligence, costs had been incurred with the Council’s external financial advisors for financial due diligence, external legal advisors for legal due diligence and external environmental advisors for an environmental survey and due diligence. There would also be costs incurred to complete the transaction as part of the Sale and Purchase Agreement. Approval was being requested to incur these fees retrospectively for the due diligence work and going forward to enable the shares to be acquired within the company. Flexibility was requested to utilise the approved financial envelope to meet the acquisition costs and any transaction costs to complete the deal.
Environmental advisors were instructed to undertake an environmental survey for the sites operated by the commercial asset. The survey concluded there were a number of operational and environmental risks that could be mitigated through the Share Purchase Agreement and actions by the Company pre completion.
Proposed governance arrangements were set out within the report to manage this commercial investment: Creation of a Member Shareholder Panel with overall responsibly for the investment, approval of the business plan and the financial parameters within which the Board of Directors and Management team could take forward decisions. It was proposed this group would meet on a minimum bi-annual basis to set the budget and receive information about the performance of the business. The Shareholders Panel would be made up of three Members.
A Board of Directors, made up of officers, would meet on at least a quarterly basis to oversee the management of the business and monitor the performance against the approved business plan.
The Board of Directors would be supported by suitably qualified Non-Executive Directors to provide advice and challenge to the Board and the Management Team. It was proposed that the current owner would provide consultancy advice and support to the Company to ensure there was a suitable continuity, handover and oversight for the operation of the business for a period of 24 months. This could be in the form of a Non-Executive Director. The membership of the Board of Directors would be agreed in consultation with Cabinet Member for City Services.
RESOLVED that, the Cabinet recommend that the Council:
1. Approve the use of its powers under Section 12 of Local Government Act 2003 and Section 1 of the Localism Act 2011 to acquire the shares in the company as a commercial investment for the maximum value as disclosed in the Private report (including transaction costs), subject to any adjustments detailed in the report.
2. Approve the addition of the commercial investment as detailed in the Private report to the capital programme.
3. Delegate authority to the Director of Streetscene and Regulatory Services, Director of Finance and Corporate Services and City Solicitor and Monitoring Officer to agree detailed terms of the transaction with the Commercial Asset.
4. Delegate authority to the Director of Streetscene and Regulatory Services, Director of Finance and Corporate Services and City Solicitor and Monitoring Officer to enter into the relevant legal agreements and associated documents necessary to complete the transaction.
5. Approve the implementation of the governance structure and associated terms of reference for the Shareholder Panel and Board of Directors, as detailed in section 2.14 of the report.
6. Delegate authority to Leader of the Council to approve the appointment of three Members onto the Shareholders Panel to represent the Council as sole shareholder of the Company.