Granada and Thorn were mainly focused on the "share of the cake" and "taking out as much cash as possible" when negotiating the launch of the 50:50 joint venture of Box Clever, the Upper Tribunal has been told.
Providing expert corporate finance and accounting evidence on 1 February, Lincoln Pensions chief executive Darren Redmayne told the tribunal this meant commercial due diligence exercises may not have been thoroughly undertaken.
In launching Box Clever Technology (BCT), a £860m loan from West LB was used to buy the respective TV rental businesses from Granada and Thorn, leaving the joint venture highly leveraged, and ultimately causing its collapse in 2003.
Now, The Pensions Regulator (TPR) is now seeking to impose a financial support direction from five ITV companies - which were previously Granada firms - for the Box Clever Group Pension Scheme.
Giving evidence on behalf of TPR, Redmayne said the cash takeout took priority over other commercial issues in the transaction.
"I agree that the size of the cake and sharing of the cake is [important]," he said. "But the shareholders have been prioritising cash takeout. [They] express a preference for cash now rather than cash later. To the extent that the cash, which was prioritised by the parties, mattered most, the price that they agreed almost didn't matter."
In prioritising cash takeout, the businesses may not have explored all the potential sale options available to them, Redmayne added.
"It would be entirely possible to bring the business together with an all-share business," he said. "It was entirely sensible to bring those businesses together but there are many ways to achieve that.
"To go to a leveraged newco [a proposed new company before being assigned a final name] immediately, I don't agree that naturally they had to do that."
For example, he said Granada could have bought Thorn or vice versa, or the two businesses' rental arms could have been sold to a third-party seller, particularly as Granada had wanted to focus on its media and hospitality businesses.
However, he agreed the synergies of the business and the potential resulting cost savings meant "prima facie, the commercial logic of this is very strong" but "that doesn't necessitate the raising of the debt and the securitisation".
Redmayne also raised concerns that proper commercial due diligence may not have been carried out or shared with all the relevant parties, namely the proposed BCT management team. This meant the new business had not been able to properly consider the risk profile it was taking on, he argued.
He pointed to work conducted by independent consultants AT Kearney, which focused on cost savings and synergies, noting that this had been completed within one week, when normally such reports would take between three and five weeks.
"It is a very brief period of time to produce a report of this nature," he argued, noting also the report mainly looked at cost synergies. "[There are an] amount of other things as part of a full commercial due diligence exercise. I would expect substantially more than just this report focused on just one aspect.
"The scope is very narrow as compared to the report I would expect."
Further analyses were also conducted by PwC and KPMG but none of the consultants had conducted comprehensive commercial due diligence, Redmayne argued.
"That expertise would be even more authoritative and informed if they were able to review and take into account commercial due diligence to inform their work," he said. "Such due diligence is not performed. The risk of the business plan is not in my opinion [assessed]."
He stated, for example, this meant the future projections of the company were carried out over a fairly short term of 18 months, rather than over the length of the repayment of the £860 loan.
The ITV & others vs The Pensions Regulator case continues... Redmayne is due to continue giving evidence on 2 February, before ITV's expert corporate finance and accounting witness takes the stand. Expert actuarial evidence is also due to be heard on 5 February.
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