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13 December 2013
The normally even-tempered Office of Fair Trading (OFT) barely tried to conceal its anger. The brewer Whitbread was in the middle of bidding £2.4bn to buy 3,500 pubs from Allied Domecq Retailing. The deal would have made Whitbread the largest pub operator in the UK with 7,000 outlets.
On 29 June the OFT issued the statement: "Whitbread has been clearly advised by OFT officials that the merger [with Allied] is to be considered at the formal meeting of the mergers panel. The panel does not meet unless there are substantive competition concerns."
Just 24 hours earlier - 28 June - Whitbread chief executive David Thomas had said that following talks with the OFT, there appeared to be no substantive competition problems.
Crossed wires with a regulator are embarrassing and potentially expensive at any time. But in the middle of a contentious takeover, with another aggressive bidder - Punch Taverns - lying in wait, angering the OFT is a very bad move.
According to people involved in the protracted and bitter barroom brawl for control of Allied Domecq's retail arm - including the Firkin and Big Steak chains - this was the moment Whitbread handed the impetus to Punch Taverns, partly backed by Whitbread rival Bass, financier George Soros and its 37 year old chairman Hugh Osmond.
There is a belief that the OFT felt it had been painted into a corner by the Whitbread statement and reacted against it by advising the Department of Trade and Industry (DTI) to refer the deal.
Whitbread sent an apologetic letter to OFT director general John Bridgeman. Thomas sought a meeting with Bridgeman to explain the "misunderstanding". But he didn't get one.
Both statements - from Whitbread and the OFT - followed meetings during May and early June involving Whitbread's company secretary Simon Barratt, competition advisers from Clifford Chance working for the brewery and representatives of the OFT. The lawyers would have discussed any regulatory concerns raised by the OFT, the likelihood of a referral and any concessions which Whitbread could make to prevent a referral. They would not have done a deal but they would have sounded the OFT out.
Meanwhile Bass had agreed a £1bn deal with Punch to buy up to 650 of the Allied pubs if Punch was successful in its £2.7bn cash bid for the Allied portfolio, which it tabled on 22 May. Without Bass - which was advised by Allen & Overy, led by Alan Paul and Susan Howard - Punch could not have launched its bid. The Whitbread/OFT argument breathed new life into the Punch bid at a time when it was already starting to be taken seriously.
Two weeks later, Thomas seemed to compound his error of judgement by telling The Observer: "We really do not see a situation where we will have a problem [with competition issues]."
Three days later the deal was referred to the Competition Commission by trade secretary Stephen Byers on the grounds that "the acquisition raises competition concerns in respect of the market for brewing and on-licence retailing in the UK."
Byers did not expand on what these "concerns" were and the following day, Whitbread, which had always said a referral would kill its bid, pulled out of the auction.
"I think it is fair to say that we were very, very surprised at the referral," says Whitbread's Simon Barratt, who sat through the negotiations with the OFT. "I also think that every one else involved - including Allied, Punch, the media and the City - were also surprised. But the OFT and competition decision are so sensitive that I would not like to comment any further."
The OFT is equally unforthcoming about what was said behind closed doors, what was promised and who got the wrong end of the stick. "You would have to ask Whitbread," says OFT spokesman Mark Kram when asked why the two parties had such a different view on the outcome of their talks.
After the bid collapsed, Clifford Chance was criticised. It was suggested that it had failed to understand the OFT's position and that of the Government. The Financial Times' Lex column wrote: "One thing the best legal minds in the City seem unable to get their heads round is the political sensitivity of activities involving the good old working man."
The Clifford Chance bid team was lead by Neil Harvey. A spokesman for the law firm refused to comment on the criticism or indeed anything relating to the failed bid other than to say: "There are still some sensitivities and if there is criticism we will have to take that."
But is the criticism justified? Did the lawyers misread the situation or has competition policy become an unpredictable political minefield where depending on the takeover target - for instance football clubs or brewers as opposed to telecoms or cable companies - the Government reacts on popular opinion? Indeed, could the lawyers have done anything to prevent the Whitbread chief executive making his remark?
"I was surprised at the criticism," says Whitbread's Barratt. "It seemed there was a plank of the media attention for a week or two that attacked our advisers as a whole. We thought we had struck a good deal for Whitbread and Allied's shareholders. There was a perception that it was a cosy deal but I was in those negotiations and they were done aggressively - there was nothing cosy."
Whitbread had already made concessions and from its unwise public statements it would seem that its competition advisers were being told by the OFT that these concessions would be enough to smooth the deal through. The brewer was preparing to sell off its brewing interests within six months of buying the Allied pubs to meet government rules. It had also calculated that concerns over regional monopolies would force it to sell-on between 80 and 300 of the Allied Domecq pubs.
And while there were other competition issues in the deal - for instance 20 per cent of the brewing arm's turnover comes from Whitbread pubs, so even if the brewing interests were sold there would be a continuing relationship - these were not referred to in Byers' statement. In fact, the DTI made no reference to any specific "competition concerns" at all.
Whatever the rights and wrongs of the referral, David Thomas' statement on 28 June, was the pivotal point. If it even appeared that the OFT was not doing an impartial job Punch and Bass would have been down on John Bridgeman like a ton of bricks.
One Westminster lobbyist with knowledge of the OFT says: "No lawyer I have ever had dealings with would ever allow him [Thomas] to make a public comment like that. It is drummed into people in triplicate that you never say what you think the OFT is likely to do.
"[OFT director general] John Bridgeman is such a bloody-minded character that if Thomas made his comments before Bridgeman had seen a report on the bid he would have studied it much more closely. The statement drew attention to the bid and highlighted other perceived weaknesses with it - for instance that it was a cosy deal."
If Whitbread is the clear loser then there can be little doubt about the main beneficiary of the confusion. Punch chairman Hugh Osmond, who comes across as a mixture of his 1970s pop star namesake Donny and Michael Douglas in Wall Street, lit up the takeover battle.
Whitbread and Allied had agreed a £2.4bn share deal - their respective legal teams including Clifford Chance and Linklaters & Alliance - headed by corporate partner Tom Wethered - had already put together large teams, working long hours to strike a deal which was agreed on 25 May.
But Osmond and Punch blew that apart with a £2.7bn cash offer which at the height of the bidding rose to £2.92bn. From early May when the Whitbread deal became public, Osmond waged a high-profile media battle with the boards of Whitbread and Allied. At the same time, Punch brought in Slaughter and May and set up its bid headquarters in Slaughters' City law office - ironically just a stone's throw from Whitbread's London headquarters - taking over a whole floor to house its bid team led by partner Neil Hyman.
Along with debt equity, employment, tax and competition the team also advised on a press advertising campaign which ridiculed the Whitbread offer. The ad campaign played on the fact that the Whitbread share price had fallen since its original bid for Allied - making its share deal less and less attractive.
Punch's final £2.7bn offer for the 3,500 pubs - it was able to shave £175m off its top price after Whitbread pulled out of the auction - was accepted by Allied shareholders on 23 August. The deal should be completed by 12 October but for one rather, especially in the circumstances, important hurdle. The OFT is waiting to be sent details of the deal to decide whether it should be referred to the Competition Commission.
"We have yet to receive a submission on the Punch/Allied deal," says OFT spokesman Mark Kram. "There will be an invitation to comment so anybody with an interest in the deal can make comment." It normally takes the OFT 40 working days to decide on whether a bid should be referred and there will be no lack of comment with rival brewers suggesting that Bass' involvement in the deal is a "competition concern".
But a Punch spokesman was taking no chances: "We don't comment on the OFT. We have never commented on the OFT. I am not willing to comment on the OFT in any way shape or form."
Perhaps this should have been David Thomas' maxim.
The sale of its 3,500 pubs plus the off-licence chains Victoria Wine and Thresher and a stake in Britvic is designed to clear the decks for a merger of spirits interests. Advised by Linklaters. Spent £40m on advisers.
Already the owner of 3,700 pubs, it wanted the deal to create the largest pub portfolio in the UK. Having already announced that it would sell its brewing interests as a concession to securing the deal it is now left to reconsider its options. Advised by Clifford Chance.
Created in 1997, through a deal to buy 1500 pubs from Bass, Punch is 70 per cent owned by the US investment fund Texas Pacific. The remainder of the stock is split between the management, Soros Private Equity Partners and a string of other venture capitalist groups. Advised by Slaughter and May. Spent an estimated £100m on advisers.
A 'junior' partner in the deal but without its injection of £1bn Punch could not have bid for the Allied pubs. Advised by Allen & Overy which previously advised Bass when it sold 1500 pubs to Punch in 1997. Allen & Overy also advised Morgan Stanley which was acting for Punch and CVC, a US venture capitalist with a stake in Punch. Spent an estimated £6m on advisers.