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This document is taken from Section Six of:- Guardianlies.com _____________________________________________________________________________ The Harrods scandal The Observer, 14 August 1988 _____________________________________________________________________________ Foreword Lonrho's chief executive, Tiny Rowland, explains first-hand the fascinating, conspiratorial events that surrounded the Fayed brothers' acquisition of House of Fraser, and which eventually led to the appointment of DTI Inspectors to investigate the affair. His article is preceded by a short trail item by City editor Melvyn Marckus. ------------------------------------------------------------------------------------------------------------- THE OBSERVER Sunday, 14 August 1988 Rowland attacks Tebbit over Harrods scandal MELVYN MARCKUS City Editor In an article entitled „The Harrods Scandal‟, exclusively published in The Observer today, Tiny Rowland, Lonrho‟s chief executive, reveals his version of the events which led up to the controversial £615 million takeover of House of Fraser by the Egyptian Fayed family. Rowland‟s article is highly critical of Norman Tebbit, the former Trade and Industry Secretary who waved Mohamed Fayed‟s takeover bid through in the space of 10 days — in stark contrast to the series of Monopolies Commission inquiries which Lonrho was subjected to. In Rowland‟s words: „I particularly remember going to see Tebbit with six Lonrho directors and our solicitors, and experiencing his “sod off Lonrho” attitude at first hand. I don‟t think I would have believed it otherwise.‟ Rowland declares: „I saw how the well-documented material containing the truth about Fayed that we began to put before the DTI was received in absolute silence. „I saw how Leon Brittan, the incoming Secretary of State for Trade and Industry, was prepared to say he could find nothing wrong with the matter.‟ He concludes: „It is the worst thing I‟ve ever seen in business, that deceits triumph so well, and can even find apologists when they are exposed.‟ Lonrho, which owns The Observer and aggressively campaigned for the DTI investigation into the Fayed/House of Fraser controversy, is known to be compiling its own 35,000-word report on the affair. Expectations were that the publication of Lonrho‟s report would coincide with the Government‟s publication of the findings of inspectors Henry Brooke QC and accountant Hugh Aldous but, in view of the decision by Trade and Industry Secretary Lord Young to delay publication of the 750-page official report, Lonrho is understood to be considering unleashing its own report in advance of the official document. Indications are that Young, who received the official report more than three weeks ago, will not release the findings until late September. Young was originally believed to favour swift publication — early on during the parliamentary recess — but is reliably understood to be concerned by legal implications. 2 Speculation that Young may choose to publish an „edited‟ version of the report has already incensed opposition MPs and Tony Blair, Labour spokesman on the City, has urged Young not to publish an „abridged‟ account of the affair. A spokesman for the DTI confirmed last week that no DTI reports had previously been edited. The Harrods Scandal, page 55 ------------------------------------------------------------------------------------------------------------- THE OBSERVER Sunday, 14 August 1988 The Harrods scandal It was pressure from Lonrho chief executive TINY ROWLAND that forced the Government to mount an inquiry into Mohamed Fayed's controversial £615 million takeover of House of Fraser. With publication of the DTI report still awaited, Rowland details the events which led up to ‘The Harrods scandal’ I FIRST met Hugh Fraser in 1977. Charming, rather hesitant, a heavy smoker and heavy gambler, he had made such headway through his fortune that he had decided to sell his last major asset, the controlling shares in the business which his father had built up and named Scottish & Universal Investments. Scottish & Universal had, among its assets, 10 per cent of the British stores group House of Fraser. Lonrho bought 26 per cent of Scottish & Universal. It was part of Lonrho‟s understanding with Hugh that he would stay on as chairman of House of Fraser, but it gradually became clear that Sir Hugh was not on terms of mutual respect with most of his board, and that the loyalty of his employees had been to his formidable father rather than to him. They did not welcome the sale of Hugh‟s shares to Lonrho — and it was only natural as a change was obviously in the air. Lonrho was an expanding and acquisitive company, and House of Fraser was a quiet and pedestrian one. My private views about bidding for the company were unformed at that time. I felt that House of Fraser needed Sir Hugh Fraser as the chairman, and he had shown outstanding talent as a retailer, winning the „Young Businessman of the Year‟ award in 1973. His career had been erratic at times, but he promised to give up gambling, and I promised to support him with Lonrho‟s ablest executives. We jointly thought that we‟d link House of Fraser with the prestigious Carter Hawley Hale (Neiman Marcus) store group in the United States, and at the same time incorporate the well-sited Woolworth chain in the United Kingdom, to form a modern powerful buying organisation which would be capable of attracting by price benefits combined with the service tradition of House of Fraser. MANY of the crowded High Street locations could be given improved access by taking in National Car Parks, then on offer to us by Sir Donald Gosling. The purchasing power of the proposed 1,500 shop outlets would have meant excellent price reductions to customers across Britain and the US. The flagship, Harrods, had never been integrated with the rest and would demerge to retain its particular character and choice. It‟s often written, as a handy journalist‟s tag, that I suffered from an obsession to control the splendid Knightsbridge store. It would be a very static and limited aim, I think. For Lonrho‟s purpose, it could have been any well-spread stores group. It was chance, and also roulette, that brought Hugh Fraser, the seller, and Lonrho, the buyer, together in 1977. 3 This was the first attempt to show how High Street stores could be revitalised — and led to a rash of department store takeovers. Unfortunately it didn‟t work for us, mostly because everything we did was subject to inquiry. My obsession was to see that Lonrho benefited from this very carefully built expansion plan, centred on House of Fraser, which could have been carried through either as a major shareholder with the goodwill of the board, or as an owner, and Harrods‟ fair profit record — the only one in the House of Fraser group of stores — was as asset to the realisation of the whole, and its name was internationally known. A month or two later, at Hugh‟s introduction, Lonrho was able to buy a further block of shares from an American stores group, and added together, these two blocks amounted to a holding of 29 per cent in House of Fraser. The first step was to acquire the outstanding shares in Scottish & Universal Investments, to consolidate our interest in House of Fraser. Our offer, supported by Hugh but opposed by the majority of the board, was finally passed by the Monopolies Commission in 1979, after nine months of hearings. Lonrho then owned Scottish & Universal outright, and also 29 per cent of House of Fraser, and was represented by two seats on that board. I took one, and Lord Duncan-Sandys the other. For the first time we saw the workings of the large stores group at close hand; and it was unimpressive. There was no team spirit aimed at improving House of Fraser, which overall really needed considerable thought to protect the future of its High Street department stores. The directors seemed intent on preserving what they had, and, to do that, they wanted Lonrho at a safe distance; I was also at fault in thinking that any chilliness towards us would be thawed by Hugh and that we would be able to reach a working understanding leading eventually to an agreed takeover or a merger and a development programme. We were confident enough that we were going in the right direction to start substantive talks with Woolworth‟s chairman in New York and to put National Car Parks on offer to the House of Fraser board. A decisive moment came soon enough, when members of the House of Fraser board took independent advice on Lonrho‟s first proposals for House of Fraser and they turned to the merchant bank, Warburgs. Warburgs at once insisted in having two representatives on the board to lead opposition to change, and to obtain practical control of the company by persuading the directors to form an inner executive committee which circumvented the board and especially Sir Hugh. I thought it highly improper, but the law allows it and the directors enjoyed it. The more visible of the two appointees was Roland Smith, a vocal professor of marketing from Manchester, who had unsuccessfully applied to join the Lonrho board the year before. Roland Smith, assured through Warburgs of the underlying support of investment institutions, cheerfully got rid of me as deputy chairman and, with less cheerfulness, asked for Sir Hugh‟s resignation. He then took over as chairman. His assets were a bluff sense of humour and an ability to carry out Warburgs‟ instructions. He marketed his own personality well, but, in my opinion, showed no management skill or ability which could benefit the business of House of Fraser and indeed, he didn‟t stay with it long. Our plans for House of Fraser were stalled, and our one-third ownership ineffective, unless Lonrho made an attractive offer for all the shares. We did, and were referred to the Monopolies and Mergers Commission. We‟d seen them so often, it was becoming a grind for both sides. Twenty-three copies of each of many hundreds of documents, a complete detailed scheme for the future of the Lonrho group and its workforce, complete documentation of Lonrho from 1961 onwards, personal evidence from all senior overseas executives, evidence at length from group bankers, audited accounts from the entire group, working forecasts for every aspect of the business of House of Fraser, 4 two senior counsel, three junior counsel, six solicitors — none of this can adequately express the expense, detail and disruption of the Monopolies hearings. After a year, the majority of Commissioners refused permission to bid, on grounds that the public interest might be harmed and, going further, instructed us to promise not to bid again unless we could show that circumstances had changed. Lonrho‟s directors then agreed not to bid without the prior permission of the Department of Trade. We were to regret signing that undertaking, and I do not think that any public company should agree to open-ended ad hoc restraints of this kind. It was subsequently used by Norman Tebbit, as Secretary of State at the Department of Trade and Industry, to unfairly restrain a Lonrho bid while he pushed another pony past the post. So Lonrho‟s offer was torn up — but we didn‟t understand what was wrong with us. „Public interest‟ and „change of circumstances‟ were vague excuses, we thought, for not permitting an offer whose target company was never part of the commanding heights of the British economy, and which was fading for lack of impulsion. NO definition of what harm might be done to the public interest was ever given. An inadequate and embarrassed reference to our ownership of Brentford Nylons was floated as a possible reason for disallowing our bid. Brentford Nylons was then worth no more than a few million pounds, and was an absurd excuse. The principal newspaper leader writers all agreed that Lonrho‟s treatment at the hands of the Commission was shameful, when the deliberations were published. During the next couple of years, the board of House of Fraser, advised by Warburgs, took many decisions which we thought were mistakes, and some which we thought were outrageously harmful to its long term commercial interests. It was a matter of different opinions, perhaps. The profit record continued to be poor and many stores were moribund. Lonrho was not successful in persuading them on any point, nor would they support any point, however constructive, which was put forward by Lonrho‟s representatives. Board meetings became a farce. We were not permitted to bid, they knew we were not permitted to bid, and finally in 1983 House of Fraser, hoping to change the DTI injunction into something more permanent than „wait until a change of circumstances‟, accused Lonrho of manoeuvring to attain influence over further blocks of shares or of secretly owning other blocks of shares or acting in concert in concert with other shareholders — it was unclear what the accusation was. They had a friend at the DTI in Sir Alexander Fletcher, and Under Secretary of State, and he was sympathetic to the idea of a further inquiry. His latest Minister, Cecil Parkinson, was on holiday in the Bahamas, but a single telephone call from his colleague, Fletcher, persuaded him to give the go-ahead for yet another inquiry into Lonrho. Another year of inquiries began, and it was small satisfaction to us to have it all dismissed. I felt there was an inside track to the DTI, and those feelings were confirmed to me later, when Fletcher offered himself to Lonrho as a „consultant‟ immediately upon his retirement from the DTI. He had much to say when he came to lunch with our board, and proposed that he should be paid a high retainer and success fee for any future bids by Lonrho, something in line with the fees which he received from James Gulliver‟s Argyll Group. We didn‟t think we could or should afford him. A bit battered by this time, we next proposed the appointment of a number of outside directors with independent experience, so that there could be some cohesion on the House of Fraser board. Although the shareholders voted against it, the margin was narrow enough to make the board uneasy again, and — what a surprise — at their request we were referred again to the Commission, accused of aiming at creeping control by calling for outside directors. I began to feel annoyed, as the convoys of documents started out again from our offices at Cheapside House to the Commission‟s offices at New Court, Carey Street. 5 Back at the dull mahogany tables of the Commission, I found myself seated opposite the familiar, tall, languid figure of Sir Godfray Le Quesne, rocking gently on his chair, with his hands clasped behind his head, and his eyes closed as he listened or slept through the hearings. He‟d been looking into us for four years, and knew our business backward. What am I doing here, I thought, as I gazed by the hour and by the month at the hole in the sole of his leather shoe, and wondered why Lonrho‟s bid was in the hands of a man who couldn‟t organise his own shoe repairs. Perhaps he felt just as bored, when he astonished Lonrho‟s chairman early in October 1984 by asking why we didn‟t sell our House of Fraser shares. As if a shutter had been opened, it became obvious that a sale was the very complete „change of circumstances‟ which the DTI had required. A sale, not to a business rival, but to an investment fund or an investor, would release us to bid again without any restrictions. It was thought by the rest of the City that we would not be able to take much more, and offers for our 29 per cent had already reached Lonrho. There‟s a price at which any business should be sold, and we had listened to three serious proposals, although we had not invited any offer. Leonard Sainer had approached Lonrho on behalf of Sears, Hambros on behalf of Henry Djanolgy and Philip Harris, and Merrill Lynch for a partnership headed by Gerald Ronson. The sale of our House of Fraser shares to any one of these able men meant stepping aside for ever, as each one certainly intended to bid. At the end of October, when the Commission, unbelievably, thought it necessary to extend their hearings for another 90 days, the Lonrho board accepted a cash offer from an Egyptian living in Britain, Mohamed Fayed. He‟d made a cash offer of £3 per share some days previously, and told me that it would be largely funded by the Maktoum family — but I was surprised that he completed, and raised the £138 million to buy 29 per cent of House of Fraser from us. He‟d been a previous shareholder of Costain and of Lonrho, but on a very much smaller scale, and he fitted our wish to sell to someone who was neither qualified for nor capable of taking over House of Fraser. That day, Lonrho notified the DTI of the complete change in circumstances. We were told that the Commission would continue — and that the Secretary of State, Norman Tebbit, would consider in his own good time when the restrictions would be lifted. House of Fraser shares were highly sensitive to any rumours of a bid, and we waited with caution and anxiety for the green light from the Ministry. And waited. Our bid was to be 380p: 300p in cash and one Lonrho share, then at 160p, for every two House of Fraser shares. We expected, based on soundings of institutional investors, that Lonrho would achieve over 50 per cent with this offer, regardless of the 29 per cent held by Fayed. Lonrho considered that he too would accept, as it offered him a profit of £35 million — his best deal ever. We waited. For four months the Commission continued while we argued that the change of circumstances entitled us to bid, whatever their conclusions. Sir Godfray and his Commissioners at last conceded that no further impediment could be found — but still Tebbit and Fletcher inexplicably refused to raise the DTI‟s embargo on us. I particularly remember going to see Tebbit with six Lonrho directors and our solicitors, and experiencing his „Sod off, Lonrho‟ attitude at first hand. I don‟t think I would have believed it otherwise. ON 4 March 1985, the Fayed brothers made an offer of £4 a share for House of Fraser. We applied twice more to the DTI for release. We immediately notified the DTI that Mohamed Fayed‟s representations were incorrect, and gave what information we had at the time, which was sufficient to alarm, or at least give pause for basic investigations. On 11 March, the merchant bank Kleinwort Benson announced on behalf of its brand new client, Fayed, that they had acceptances from House of Fraser shareholders for more than 50 per cent of the issued share capital. Three hours later a junior official of the DTI sent a note, uselessly releasing Lonrho from its undertakings not to bid. 6 In 10 days, the unknown Fayeds gained permission to own House of Fraser, and throughout the 10 days they put continuous lies before the public to justify the Government permissions they had got with such ease. It was this that made me suspect collusion between the DTI‟s officials and Fayed, and between Fayed and Kleinwort Benson, to put forward and to accept false submissions as to the credentials, business experience and empty empire of Fayed. I had nothing against his being a wealthy commission agent — I had everything against his cheating his way into House of Fraser, helped by Kleinwort Benson and Tebbit. It was bitter, but funny, to see that Professor Smith had doubled his own salary before recommending the offer from Fayed, and added a pre-dated bonus for good measure. I saw how Brian Basham of Broad Street Associates and the barrister, Royston Webb, helped venal journalists to turn a sow‟s ear into a golden purse, and how that golden purse was well received everywhere that it opened. I saw how the well-documented material containing the truth about Fayed that we began to put before the DTI was received in embarrassed silence. I saw how Leon Brittan, the incoming Secretary of State for Trade and Industry, was prepared to say he could find no wrong with the matter. I took my first job in the City in 1936, working for Little and Company at 5 Fenchurch Street. I‟ve been a director of British public companies for 31 years. It is the worst thing that I‟ve ever seen in business, that deceits triumph so well, and can even find apologists when they are exposed. I am glad that after two years inspectors were appointed, and that they have expended 18 months upon investigating the takeover of House of Fraser.
"The Harrods scandal"