Chapter 2 - The Sale Process
In this chapter, the Committee provides
background information and then outlines the sale process. It also considers
some issues relating to that process which arose during the inquiry.
The Department of Defence’s production
facilities had evolved to meet defence needs during two world wars and later
conflicts in Korea and Vietnam. This left Australia with a fragmented munitions
industry comprising seven facilities at seven different sites and a vastly overdeveloped
capacity for production.
The process of rationalisation began with the
closure of the unprofitable Department of Defence Support in 1984. Since then,
a continuing process of restructuring, rationalisation and commercialisation
had overseen the closure of two government-owned Defence factories and the sale
of the Williamstown Naval Dockyard in Victoria and of the Aircraft Work Shop in
South Australia. Two former government-owned aircraft factories at Fisherman’s
Bend and Avalon were converted into the government-owned enterprise Aerospace
Technologies of Australia, which was later privatised.
On 3 May 1989, Australian Defence Industries Pty
Ltd (ADI) was created to take over the former Office of Defence Industries. The
change put the Office’s assets in the hands of a separate, limited liability
company to be run as a commercial venture.
The overall objective was to revitalise the Australian defence industry and
make it globally competitive.
The corporatisation process, which began before
corporatisation occurred in 1989, involved a major rationalisation of
government-owned dockyards and factories. The rationalisation of munitions
manufacturing capability involved the closure of two munitions factories,
Albion Explosives Factory (1986) and the Explosives Factory at Maribyrnong
(1993). The capabilities of these factories were moved to the Mulwala
Explosives Factory. Associated costs of the closures were in the
decontamination, demolition and preparation of those sites to meet regulatory
requirements, preparatory to their redevelopment. 
Within its first year of operation, ADI Managing
Director, Mr Ken Harris, announced that ADI would undergo a major restructuring
program under which ADI would consolidate the currently fragmented industry by
opening a new state-of-the-art ammunition facility at a ‘greenfield’ site, to
be selected according to economic and strategic considerations. Other
facilities at Maribyrnong, St Mary’s and Footscray would be progressively
closed and their sites sold for redevelopment for residential, light industrial
or recreational purposes. These sales would in part fund ADI’s new plant and
the upgrading of the Bendigo factory, which was to become the centre of ADI’s
heavy engineering work. The Mulwala and Lithgow sites would continue production
of explosives and small arms respectively as part of ADI’s newly integrated
In addition, ADI’s profitable naval engineering and clothing divisions, through
fulfilling a number of long-term Government contracts, would contribute to
ADI’s bid for sustainability.
In late 1992, ADI was given permission to build
the new munitions factory at Benalla, Victoria.
ADI considered that the introduction of modern technology and an 80 per cent
cut in the labour force would give Australia one of the most efficient plants
in the world.
The new factory was opened on 6 August 1996.
In the mid 1990s, ADI focussed on enhancing its
profile and participation in the international defence trade. In response to an
increased international interest in ADI’s products, the company had opened
offices in Kuala Lumpur, Abu Dhabi, and Berlin.
By 1997, the new munitions business in Benalla,
now in full production, was a major contributor to the record profit. The Minehunter project was
another strong contributor, also fuelling local confidence and expertise, with
high Australian design and manufactured content.
Preparation for Sale of ADI Limited
The possible sale of ADI, in its entirety or in
parts, was considered in 1992 but no proposition acceptable to the Government
The matter was on the agenda again in 1995, when the then Minister for Defence
announced that, after careful consideration of the question of privatising ADI,
the Government had decided that it ‘was not appropriate to do so in the
Mr Harris told the Committee that whenever the Board of ADI was asked for
advice before late 1996, the board replied that the company was not yet ready
In February 1996, the then Leader of the Opposition, Mr John Howard, gave
undertakings that the they would not privatise ADI if they won government.
The change of name to ADI Limited in January
1996 was designed to emphasise ADI’s private sector credentials. Mr Harris told
the Business Review Weekly: ‘We operate as a normal private company
under the Companies Act, and the Government happens to be a single share
In December 1996, ADI’s Board of Directors told
the Government that ADI was ready for privatisation. Having proven that ADI could
be viable as a corporate entity, the Board saw privatisation as the means to
gain funding for further growth. Mr Harris later explained to ADI employees:
At the core of any debate that might take place about
privatisation of the company, is the issue of the shareholder's willingness to
provide the company with capital to fund our future growth. Australian and
overseas experience would lead to the conclusion that governments have some
difficulty in funding the development of their companies.
The new Government’s conviction was that
governments are not appropriate partners for business enterprises. Mr Harris was confident that
the commercial success ADI had achieved after corporatisation would attract the
necessary investment for growth from the private sector.
In the Budget of May 1997, the Government
foreshadowed its intention to look into the optimal timing for the sale of ADI,
the means of sale and related issues during 1997-98. On 1 July 1997, the
Minister for Finance announced that the Government had appointed the firms
Baring Brothers Burrows and Co. Limited and Blake Dawson Waldron as business
and legal advisers (respectively) to the Office of Asset Sales & IT
Outsourcing (OASITO) for the sale.
The sale of ADI was complicated not only by the
nature and structure of the company but also by its extensive relationship with
the Commonwealth, which included:
Commonwealth’s role as sole shareholder of ADI;
- the role of
the Commonwealth, through ... Defence, as ADI’s major customer;
contractual arrangements between the Commonwealth and ADI, many of which
related to the time of ADI’s formation; and
Commonwealth’s responsibility for defence policy, defence industry policy and
matters of national security.
OASITO submitted that it gave highest priority
to protecting the interests of the Commonwealth at all times.
The sale process began in July 1997. OASITO
described the process as consisting of three phases:
- the scoping study;
- sale preparation; and
- the sale.
OASITO stated that the sale process was designed
to take into account the nature of ADI and its relationship to the
Commonwealth. Careful work was required to establish an appropriate structure
for the sale and to identify areas for restructuring prior to it to reduce risk
and to make ADI more attractive for prospective buyers. Strict evaluation
criteria were adopted to guide decision-making processes and to ensure the
integrity of the sale process.
Scoping study phase
In the scoping study phase, the groundwork was
done to establish the terms of the sale. It involved:
- a business analysis;
- vendor due diligence;
- an analysis of Defence policy; and
- a market testing exercise.
The business analysis involved consultation and
site visits to each of ADI’s facilities, presentations by ADI management, a
review of ADI’s financial performance as well as industry reviews and meetings
with Defence representatives to gain a full understanding of ADI’s business and
the environment in which it operated.
Vendor due diligence
The vendor due diligence enabled the
Commonwealth to make decisions about the sale structure, process and possible
terms of sale. During this process and the sale phase, over 18,000 documents,
which were identified and obtained from ADI and other Commonwealth agencies,
were collated and tracked to form the Commonwealth Library. From these
documents, a confidential
four-volume Information Memorandum was compiled and
provided to prospective buyers undertaking their own due diligence. They also had access to the
Commonwealth Library through a CD ROM information dissemination system.
Analysis of Defence policy
The Government Sales Team analysed and reviewed
Defence arrangements with ADI and consulted officers within Defence and other
departments ‘to identify key strategic and procurement policy issues and
priorities’. Key issues and implications for Defence in the sale process were
issues potentially arising in various defence industries, in particular the
naval shipbuilding and repair sector. Defence agreed that the ACCC was the
appropriate body to assess competition implications;
involvement in activities considered to be important to Australia’s military
operation or ownership of significant defence-related facilities such as Garden
Island, Benalla and Mulwala (to which Defence may require access in emergency
foreign ownership in ADI;
protection of classified information including that provided by other
requirements for fulfilling Defence contracts;
- the need to
remove Defence Required Support Capability (DRSC) arrangements at Garden
Island, St Mary’s and Mulwala;
- the need
to remove a number of arrangements which were no longer appropriate for
transmission to the private sector (eg foreign warship indemnity);
- the need to
ensure any capabilities considered essential to Defence’s strategic interests
were recognised; and
issues for Defence’s policy of achieving ‘value for money’ in all areas of
procurement, in particular through arrangements maintaining open and effective
Market testing exercise
The Government sales team conducted a market
testing survey among defence industry participants in Australia and overseas,
and among engineering/construction participants, investors and brokers. The
survey revealed a strong preference for removal of defence property interests
from the sale. OASITO reported that a number also saw no commercial rationale
or market incentive for acquiring a merged ADI/Australian Submarine
However, Dr White of SECA did express a strong interest in SECA buying the ASC
in conjunction with ADI. He said that:
We believed that ADI was not in great shape in its current
form. It really needed a great deal of work to it to turn it into a great
company that we envisaged. We believed that ADI was really too small, as a
stand-alone company, to compete in the international arena. Since our
consortium of Australian companies was not backed in an equity sense by big
overseas players, we believed we needed to bring ADI together with ASC, the
Australian Submarine Corporation, in order to have a decent sized Australian
company as the springboard for the internationally sustainable, majority
Australian owned company we were envisaging in the long term.
The scoping phase was completed by December
On 9 December 1997, the Minister for Finance and
the Minister for Defence issued a joint media release announcing that ADI
Limited would be sold through an open tender trade sale. Expressions of
interest were expected to be invited in the first quarter of 1998. The
The sale of ADI Limited will represent the final stage of reform
of the government-owned elements of the defence industry and is expected to
facilitate growth in the defence industry through private capital investment
and technology transfer.
The sale preparation phase
In this phase, OASITO addressed a wide range of
matters identified during the scoping phase where action had to be taken to
prepare ADI Limited for a smooth transition from government to private
ownership. These were:
- restructuring of the long-term agreement between the ADF and ADI
for the supply of munitions from ADI’s Benalla facility to become the Strategic
Agreement for Munitions Supply (SAMS), to meet Defence’s long-term needs and
keep an Australian munitions capacity.
- restructuring of the terms of supply of high explosive and propellants
from Mulwala, a Commonwealth facility leased to ADI;
- identification and clarification of ADI’s intellectual property
and establishment of an intellectual property register;
- protection of the Commonwealth’s commercial interests in the
frigate upgrade and Bushmaster tenders, and separation of the two tenders from
the ADI sale process;
- removal of ADI property interests from the sale;
- restructuring and renegotiation of the Garden Island lease;
- environmental assessment of ADI sites;
- development of strategies to identify and resolve as much as
possible litigious or potentially litigious matters to which ADI was a party;
- establishment of a contracts register;
- review of taxation issues;
restructuring of debt facilities and guarantees;
- removal of indemnity arrangements and substitution of insurance
suitable for private ownership;
- development of an occupation, health and safety strategy at ADI
- clarification and amendment of ADI constitutional documents to
remove references of Commonwealth ownership;
- identification and monitoring of human resources and industrial
relations issues during the sale process;
identification of competition issues and development of
strategies in anticipation of possible contingencies, such as possible action
by the ACCC under section 50 of the Trade Practices Act;
- seeking of third party consents to provision of sale information
to Commonwealth and prospective buyers;
- analysis of risks arising from vendor due diligence covering
terms of sale, warranties, indemnities, insurance, litigation and other
- foreign ownership in relation to structural approvals under the
Government foreign investment policy.
The sale phase
The sale phase was conducted in four stages:
- the establishment of a sale strategy;
- calling for expressions of interest and requests for proposal;
buyer due diligence; and
- evaluation of proposals received.
The sale strategy was established in June 1998
to set a timetable for the process, and to assign roles and responsibilities.
It set out the following sale objectives, against which the bids of tenderers
would be evaluated:
optimise sale proceeds within the context of the Government’s other sale
- to minimise
the Commonwealth’s exposure to residual risks and liabilities;
- to ensure
the new owner has the necessary financial capability to complete the sale and
meet ADI’s current and likely contractual arrangements;
- to ensure
the new owner has the appropriate contract management expertise, capability and
commitment to the fulfilment of ADI’s current and likely contractual
obligations with the Commonwealth;
- to ensure
the new owner has the necessary management expertise, defence and/or relevant
general industry experience and a long term commitment to operate as a credible
and effective participant in the Australian defence industry;
- to achieve
a sale outcome which avoids the retention of any of ADI’s businesses by the
Commonwealth post sale;
- to ensure
fair and equitable treatment of ADI staff in the Sale Process; and,
- to achieve
a sale outcome which contributed to a competitive, sustainable and efficient
Australian defence industry, as well as to regional industry development.
Expressions of interest
The calling of expressions of interest did not
eventuate as predicted in the first quarter of 1998. On 22 April 1998, the
Minister for Finance and Administration announced that expressions of interests
would not now be called until June 1998. Defence was in the process of
negotiating a new seventeen-year ammunition supply agreement with ADI which
would lock any potential buyer into a continuing commitment to local munitions
capability. The Government, therefore, wished to delay the sale process until
this important agreement was settled.
It was also widely speculated that the new
munitions contract would increase the estimated value of ADI (unofficially at
$400 million) to potential buyers. Mr Harris fuelled this speculation, saying
that the new defence agreement was more ‘commercially robust’ than the previous
one and that he was: ‘sure that this outcome will be recognised by those
companies currently preparing bids.’
The expressions of interest and request for
proposal phase was aimed at informing prospective buyers about how their
offers would be assessed and was conducted according to a pre-defined
methodology, with the roles and responsibilities of each party being fully
The invitation to register expressions of
interest in ADI Limited was advertised in the media on 10 June 1998. Expressions of interest were
to be lodged by midday on 9 July 1998.
One hundred invitations to register an expression of interest were issued. On 10 July 1998, the
Government announced that the munitions contract had been finalised. It also
stated that it had received expressions of interest for ADI which were being
assessed, concluding that the ‘signing of the ammunition agreement will assist
short-listed parties to formulate their formal bids’. On 31 July 1998, a press
release announced that five consortia had been short-listed. Mr Hutchinson
told the Committee that the identities of the five consortia were never
In August 1998, a request for proposal was
issued to the five short-listed prospective buyers. These provided an overview
of the sale process, listed requirements for buyers and outlined the evaluation
criteria by which offers would be assessed.
In September 1998, ADI was one of two contenders
short-listed for Defence’s billion-dollar guided missile frigate upgrade contract
which was to be awarded later in the year. The Government was explicit about
its expectations: ‘Should ADI be selected as the preferred tenderer for the FFG
Upgrade Project, the value placed by bidders on the company could be expected
to be significantly enhanced.’ A further variation to the original sale
specifications were that ADI properties at St Mary’s, Footscray and
Maribyrnong, which were undergoing site redevelopment in a joint venture with
Lend Lease, would not be included in the sale.
A phased date for receipt of offers was devised
to accommodate the letting of the frigate upgrade contract. If ADI was not the
preferred tenderer, offers for ADI were to be lodged by 25 February 1999. If it
was the preferred tenderer, the closing date for offers was deferred to 9 June
As it turned out, ADI secured the contract.
Buyer due diligence
Buyer due diligence began in September 1998. This involved the supply of
information to prospective buyers to ensure that the Commonwealth complied with
its obligations of full disclosure prior to the sale. It was a two-way process
during which site inspection and access to the Commonwealth Library led to
formal question and answer engagements. Draft sale documents were issued to
potential buyers in October and November 1998 and their comments on SAMS
sought. Mid-term review meetings were held with representatives of the
potential buyers in April 1999 to seek their opinions of the Commonwealth’s
approaches on a number of issues. During the period a number of consortia
sought and were granted permission to make changes to their composition.
With each new contract won by ADI, the consortia
tendering for the purchase of ADI were required to undertake a fresh round of
due diligence processes and site inspections in order to take into account the
new contract in their bids. Responding to the rising uncertainty, on 3 May
1999, the Minister for Finance and Administration announced that it was the
Government’s intention that bids for ADI should be lodged by the end of June
1999 and that the sale should be completed by late Spring.
Evaluation of bids
After receipt of bids, they were evaluated
against sale objectives. On 17 August 1999, Transfield Thomson-CSF was selected
as preferred buyer of the Commonwealths shares in ADI Limited.
Preferred buyer due diligence phase
In the final part of the sale process, the
preferred buyer was given the opportunity to undertake further due diligence
and to inspect material withheld during previous due diligence phases. The
Commonwealth also negotiated with Transfield Thomson-CSF Investments Pty Ltd to
‘resolve all issues outstanding with its Offer’. As a result of these
negotiations, agreement was reached between the Commonwealth and the preferred
buyer on all major issues. ‘This agreement has clarified the areas of
uncertainty in the Offer of 30 June 1999 and has removed or revised a
significant number of terms and conditions that were considered unacceptable to
For commercial-in-confidence reasons, the terms and conditions in contention
were not provided to the Committee.
At the same time, ADI’s property interests were
transferred to a new Commonwealth-owned company group, ComLand Limited. Sales
documentation was finalised with provision of documents that had previously
been available only in draft form. These comprised:
ADI Share Sale Agreement;
1999 Deed of Indemnity;
Intellectual Property and Material Transfer Deed;
Wrap UP Deed;
Record Transfer Deed; and
The ADI Share Sale Agreement was executed on 8
October 1999 subject to a number of conditions. These conditions were
satisfied on 1 November 1999.
Details of these conditions were not made available to the Committee for
commercial-in-confidence reasons. Final settlement of the transaction occurred
on 29 November 1999, at which time Transfield Thomson-CSF Pty Ltd assumed
ownership and full operational control of ADI Limited.
The integrity of the sale process
The terms of reference of the inquiry required
the Committee to consider whether the sale of ADI had been conducted with the ‘prudence, discretion,
integrity, skill and propriety’ necessary to:
- protect the value
of ADI and its assets;
- realise the
maximum price for ADI and its assets; and
Australia’s national interest, national security and defence relationships from
The terms also
required the Committee to examine whether OASITO, its advisers and others
engaged in the sale process had best served the interests of Australian
taxpayers and the broader national interest.
Mr Michael Hutchinson, Chief Executive of
OASITO, told the Committee:
We have a high degree of
confidence in the probity arrangements we have in place for the sale. We have
every reason to believe they have worked as intended and no reason to believe
there have been any flaws or failings in the probity process.
In its submission, OASITO documented the sale
process, drawing out relevant details at issue in every sequence. This approach,
while somewhat repetitive, aimed to support OASITO’s claim that the sale of ADI
Limited was conducted ‘with prudence, discretion, integrity, skill and
propriety’, sufficient to satisfy the terms of reference of this inquiry.
During the hearings, most witnesses expressed
overall satisfaction with the process. In his opening statement, Mr Tony Shepherd, Chief
Executive Officer, Project Development, Transfield, said: ‘We consider the sale
of ADI has been conducted with the utmost prudence, discretion, integrity,
skill and propriety’.
Mr Ian Sharp, Managing Director of GEC-Marconi Systems Pty Limited agreed that
‘with respect to probity, the process was fine’. Group
Manager-Commercial of Tenix Pty Limited, Mr John Favaloro, told the Committee:
I do not think that we have
any objections to the way in which the process was conducted. I would agree
that probity was paramount in the government’s mind and I think they kept the
process very clean. The confidentiality agreements, which they drove over the
top of all this, were in our view extreme. They were very demanding.
They were, in our view, probably more than was
required. But, if nothing else, they drove home the point that probity was
The nature and
complexity of ADI’s business arrangements, its relationship to Government, and
the fact that ADI was tendering for major Defence contracts during the sale
period made probity and the integrity of the sale process a challenge for
OASITO. Conjecture that the Government was seeking to appreciate the value of
ADI by awarding it the billion-dollar frigate upgrade and Bushmaster contracts
made OASITO’s task even more difficult. Mr Hutchinson stated: ‘In terms of the
sale process, I have to say that it would have been an awful lot easier had
those tenders not been in the marketplace during the sale process.
judged that the frigate upgrade was ‘one of the top three complexity factors’
in the sale process, with the other two being management of intellectual
property and environment matters.
While the last two required sensitive handling, for strategic and economic reasons
respectively, the need to guarantee separation of the tendering processes for
ADI and the frigate upgrade, in particular, drove OASITO to adopt measures in
pursuit of probity which were to have wider effects on the process.
Two steps were
taken: the appointment of a special probity monitor and the the phasing of the
ADI sale process. The probity monitor was engaged to provide a degree of
confidence to all parties that there would be no correspondence of information
between individuals conducting the ADI sale process and Defence staff
evaluating the contract tenders.
In relation to the phasing of the sale process, Mr Hutchinson told the
Committee that this would:
allow the Commonwealth’s interest in those tenders to be settled
before the Commonwealth’s interest in the sale process was settled, on the
grounds that these tenders were far larger in scale than the Commonwealth’s
financial interest in the ownership of ADI. Therefore, the Commonwealth’s
overall interest was to be maximised by buying the right defence equipment and
then selling the contractor rather than selling the contractor on the basis
that we had awarded a tender to it or that we might award a tender to it ...
heard that OASITO’s concern for probity in the separation of tenders had other
consequences for the sale process. ADI’s former Managing Director, Mr Ken
Harris, noted that: ‘everybody in the government decision-making team was so
nervous about the political consequences of those sort of allegations that they
redoubled their efforts to be cautious’. One effect was the lengthening of the time
frame of the sale.
received no information that cast any doubt on the integrity of the sale
process. It appeared that OASITO and its advisers went to considerable lengths
to ensure the integrity and propriety of the sale even though this lengthened
the process. These measures included OASITO’s requirement that participants
adhere to extensive confidentiality provisions. As far as the Committee could
determine, the confidentiality provisions were not breached. It notes,
however, comments from some participants that the confidentiality provisions
were too onerous.
The length of the sale process
While OASITO was
commended for its overall handling of the sale, the length of the sale process
received comment and expressions of concern from some witnesses. Mr Harris
I have got admiration for
the Office of Assets Sales...They have handled some large complex privatisation
and they have done well. With this one, the time seemed to get out of hand and
that really was the issue. The time was, I think, unduly long for a commercial
sale such as this.
Apart from the
deliberate phasing of the sale to protect the integrity of the tendering
process, the complexity of ADI’s businesses was an acknowledged cause of much
of this delay. As Mr Shepherd (Transfield) said: ‘ADI is a complex business,
with 3,000 staff, many contracts and a diverse range of assets and facilities.
This complexity contributed to the lengthy sales process’.
The complexity of
the businesses meant that the vendor due diligence process was a long and
difficult task. Mr Sharp (GEC-Marconi) said that his organisation had received
literally ‘boxes and boxes of wonderful data’ during the sale process. He took
this as being indicative of the Government sale team’s determination to inform
fully prospective bidders, given that Defence projects entail considerable risk
and require extensive due diligence.
Even so, Mr Sharp
did judge the sale process to be inordinately long. He noted that 12 months
from concept to reality was normal for a merger or acquisition process, with a
data room being set up within months, open for a number of weeks and an offer
made within the following two weeks.
He thought that part of the reason was that the cumulation and provision of
information was not conducted as pragmatically as had been done in other merger
processes in which his firm had been engaged.
Mr Sharp was not
uncritical of the content of the information provided and, in particular, the
timing of its provision. He noted that a lot of the information was of an
historical nature. Information on ADI’s present business position and future
prospects was not provided until late in the process. Mr
Favaloro (Tenix) confirmed that the late release of this important financial
information had meant that Tenix had lodged three bids and yet there were
‘still hundreds of unanswered questions’ about ADI. He thought that the
withholding of this information had been the ‘main sticking point’ for all
bidders in the process. 
Further, the late
provision of this information made the process more expensive for prospective
purchasers. Mr Sharp explained that GEC-Marconi had to pay its advisers a
retainer fee on fixed rates for the whole sale process, with most of the
valuation work having to be done in the last two months. This made the bidding
process very expensive, a point reiterated by representatives from SECA, Tenix
Hutchinson (OASITO) replied:
All the bidders received the
information in line with the information disclosure plan that we had in place
for the sale. It is always the case in a sale process that a bidder will want
information that you are not yet prepared to release or that you do not yet
have ready before you are ready to give it to them. I would be very surprised
if any bidder told you that they got everything they wanted precisely when they
wanted it, but we are confident that the information disclosure regime we put
in place was appropriate, given our need to not only meet the needs of the
bidders but also protect the value of the business from inappropriate
disclosure and the post-sale interests of the Commonwealth by ensuring that the
information that was disclosed was appropriately verified and appropriately
reviewed before release.
The cost and
complexities involved in bidding were similarly dismissed as ‘just a fact of
life’. Mr Hutchinson explained that ADI’s business arrangements meant dealing
with complexity and volume, and that, therefore, time and money would be spent
in reaching the goal.
Overall, the contenders, while expressing some dissatisfaction, agreed with
For ADI itself,
the length of the process caused other problems. Mr Harris said that ADI’s
management team was often distracted from running the company’s commercial
interests by having to spend a lot of time providing information for due
diligence upgrades and inspections with prospective buyers. The morale of ADI’s
staff during the period also required continual support.
Dr White expressed
I think the process was too long. It made it very expensive and
very changeable. ADI continued to deteriorate in its commercial viability. I
think the process was started without any real statement of strategically
desired outcomes in terms of Australian ownership industry capability.
I think any business which is up for sale suffers morale
problems and problems in the market because potential customers, suppliers or
partners are dealing with a situation of total uncertainty as to whom the
future owner will be, what business they will be in, how they will be in it and
who is employed.
Mr Harris also
said that the extended sale process meant that necessary restructuring that
would have given ADI Limited a stronger combat systems focus had not taken
place. He had identified the need for the restructuring in 1997, but it had not
been carried out because the sale, at that time, was thought to be imminent. Even so,
he concluded that the proposed restructuring would not have appreciated ADI’s
market value had it gone through. He explained that companies interested in ADI
would have conducted their own evaluation and arrived at their own game plan
for the company.
agreed with this view, noting that three serious bidders - SECA, Transfield
Thomson-CSF and Tenix - all had very different structures in mind for ADI
Limited. He discounted the suggestion, however, that OASITO had in any way
discouraged Mr Harris from restructuring ADI at that time. Mr
Hutchinson also partly attributed the length of the sale process to ADI’s
unpreparedness for sale when the process was started, despite contrary advice
He explained that
issues arising out of ADI’s structure and method of operation, legacies of its
days under Commonwealth ownership, were ‘fairly lengthy and intractable’ in
resolution. He singled out three areas of particular concern:
Firstly, there was the need
to resolve the occupational health and safety and environmental considerations
at Mulwala, the explosives operation. Secondly, there was the need to
completely redraft and reshape the strategic ammunitions supply contract with
the Department of Defence, the cornerstone of the cash flows in the business.
Thirdly, there was the need to resolve the indemnity structure that had been
put in place on the foundation of ADI that needed to be unwound, and unwound
through the various Commonwealth contracts.
In addition to the
need to address these matters and the deliberate phasing of the sale to
accommodate the letting of tenders for defence contracts, Mr Hutchinson listed
one other important factor which lengthened the sale process. This was the need
to transfer and document intellectual property, and to allocate intellectual
property between ADI and the Commonwealth. This had been a commitment made at
the time of the foundation of ADI but which had never been finalised. Mr
Hutchinson concluded that these were simply facts of the process, and not the
fault of any party.
In answer to a question
whether OASITO kept ADI informed of developments in the sale process, Mr Harris
It was an extremely difficult period but it was difficult for
them as well. It was a difficult thing for everybody involved in the sale
process. They told us as best they could what was happening, but I just do not
think they were fully in control of all the events either, because you had
another layer involved in it, namely the Department of Defence, and they had a
program. they had activities which were influencing the outcome as well. So I
think, in some respects, the Office of Asset Sales were caught in a project
that turned out to be perhaps a bit larger and more complicated than people
expected. Where they did not tell us of deadlines and dates, I think it was
because they were not really in a position to be firmly clear about them.
acknowledges that it was undoubtedly a very long sale process, which was due to
a number of factors. ADI’s structure and the complexity of its business
operations and OASITO’s cautious and thorough approach to the task to ensure
the integrity of the process and the protection of the Commonwealth’s interests
were never conducive to a quick sale. ADI’s involvement in two major tenders
also contributed to the length of the sale process.
The length of the sale process made the exercise
more expensive for prospective buyers and made it difficult for management of
ADI to keep its businesses going and maintain morale of staff. It also
increased the Commonwealth’s costs by having to keep the Government sale team
together throughout the process. However, no-one suggested ways by which this
particular sale process might have been shortened to any significant extent.
The price & the value
Throughout the sale process there was conjecture
about the value of ADI and the price likely to be realised from its sale.
The Government sale team determined that it
would receive a better price for ADI if it were sold as a whole rather than
broken up into several entities. However, ADI’s property development interests
were excluded from the sale when market testing suggested they lacked coherence
with its core engineering businesses.
The sale team also agreed that complications in the ownership of the Australian
Submarine Corporation (ASC) would cause problems if it was sold with ADI. The
Government therefore decided that the sale of the ASC should be considered at a
As the Government was unwilling to release
official estimates of the value of ADI for fear of jeopardising the sale
process, the value and likely sale price were subject to widespread
speculation. Media estimates of the possible price for ADI ranged from $225
million to twice that amount.
It should be noted that when the Office of Defence Production became ADI, it
had assets of $426 million, including the three properties excised from the ADI
Dr John White told
the Committee that SECA had made an unsolicited bid for ADI at book value of
$320 million in 1997, provided that SECA ‘could also buy the Australian
government’s shares in ASC for some sort of book value or agreed value’.
On 2 November 1999, the Ministers for Finance
and Administration and Defence announced that the final price for ADI was
The final price did not include ADI’s development property assets, included in
the early valuation, and which Mr Harris estimated to be valued at about $160
However, the value of ADI was not static over
the period of the sale process. Mr Hutchinson told the Committee:
The factors that affected
the evolving picture of the value of the company as the sale process advanced
were principally its trading record, its success in winning new contracts, the
resolution of outstanding commercial issues such as litigation within the
business and the evolving expectation of future work flow and therefore future
cash flows. They are the sorts of factors that, as they changed, the expected
value of the company would change.
Information received by the Committee late in
the inquiry reported that, after a year of achievement in 1997, ADI experienced
a year of marginal growth in 1998-99.
According to company accounts lodged with the Australian Securities and
Investments Commission on 29 October 1999, ADI posted a $190.6 million loss on
a consolidated turnover of $571.9 million after abnormals and tax were taken
into account. ADI’s operational profit pre tax in the year ending June 1999 had
fallen sharply to $12.2 million, down from $37.5 million the previous year. To
balance these losses, the Commonwealth had agreed to forgive ADI debts to the
extent of $45.5 million. This meant that ADI now had an asset value of $163.7
million, less than half Transfield Thomson-CSF’s final price.
Mr Hutchinson confirmed that ADI had been sold
for approximately twice net asset value.
Mr Harris dismissed the idea that ADI’s value
could be ascertained from its fluctuating balance sheets. He argued that ADI
was saleable because of its strong position in the market place, earned by the
intellectual and technical skills of its staff, and not because of its material
These two factors were clearly criteria rated
highly by Transfield Thomson-CSF. The Joint Venture stated explicitly in its
submission that ownership of ADI Limited constituted a ‘major strategic investment
opportunity’, because it will bridge their aspirations to growth globally and
in the region.
Mr Shepherd (Transfield) stated that the Joint Venture saw that the ‘real asset
value’ of the company lay in ADI’s staff.
The combination of the price paid for ADI by
Transfield Thomson-CSF and Mr Harris’ estimate of the value of ADI’s
development properties not included in the sale amounted to approximately $500
million, which was towards the upper end of the speculated value of ADI during
the sale process. The Committee received no evidence to suggest that the
Commonwealth did not receive due value from the sale of ADI. There was also no
criticism during the inquiry to suggest that the sale process used by OASITO
and its advisers resulted in a lower price than might otherwise have been
achieved. The integrity of the sale process was also not questioned by
witnesses. It is not possible for the Committee to establish whether the
Commonwealth achieved the best price it could for ADI. However, the Committee does
accept that OASITO did the best it could to achieve this goal.
It should, of course, be noted that price was
not the only factor used in the evaluation of bids for ADI. The bids were
evaluated against a number of criteria. The Committee was not privy to whether
the price offered by Transfield Thomson-CSF was the highest price. The
Government accepted the package offered by Transfield Thomson-CSF, which was
subject to refinement before finalisation of the sale on 29 November 1999.
The Committee considered the position of ADI
employees during and after the sale of ADI.
Mr Shepherd and Mr Harris both commented on the
negative effects of the long sale process on the morale of ADI’s staff. However, Mr Hutchinson told
the Committee that:
it was explicitly an
obligation on ADI management to keep its staff informed of both the development
of the sale process - within the bounds of what was able to be said to them -
and in respect of its own position. That is something that ADI management
undertook to do, and did, during the sale process. It did not need, require or
want any help from us in dealing with its own employees.
Mr Harris told the Committee that on his
extensive tours of ADI sites during the sale, it was not privatisation itself
but the outcomes of privatisation that were of concern to employees. Employees
asked, ‘who is going to buy the company? What are they going to do? What does
it mean for me? What does it mean for my local area?’
Post-sale conditions of service
Sale objective VII provided ‘to ensure fair and
equitable treatment of ADI staff in the sale process’. While issues relating to
industrial and human relations, such as redundancy, workers compensation and
superannuation were reviewed in the scoping study, they did not raise matters
that needed ‘to be addressed in the sale process - that is, matters that the
sale process needs to intervene in as between employees and the company’.
Mr Hutchinson told the Committee that the
Government had determined during the scoping phase that these issues were
between ADI’s management and its staff. They were not the responsibility of the
Commonwealth during or after the sale process.
Asked whether ‘there was nothing in the bidding process where you stipulated to
the bidders that there was to be no loss of entitlements to the employees as a
result of the sale of ADI’, Mr Hutchinson said:
No, because the employees remain in a continuing employment
relationship with ADI and therefore their future employment prospects are
wholly governed by general community applicable industrial relations practices
and laws. There is no change of employer and, therefore, there is no call to
intervene between the employer and the employee. The employer, ADI Ltd,
remains the same body.
In his submission, Mr Mervyn Smith urged the
Committee to investigate any possible disadvantage to ADI’s staff holding
membership of the Commonwealth superannuation under the process of transferral
to private ownership.
When ADI was corporatised, several hundred
employees out of 4,000, who were at lower pay levels, were assessed as being
disadvantaged by the move to private superannuation. As ADI was an approved
authority under the Superannuation Act 1976, these disadvantaged
employees were allowed to remain within the Commonwealth Superannuation Scheme
(CSS). In mid 1999, ADI engaged consultants, Parker Financial Services, to
analyse the effect of the forced change in their superannuation arrangements
for the 337 employees still contributing to the CSS. The consultants found
that there were 147 CSS members (44%) potentially detrimentally affected by the
mandatory termination of their CSS contributory membership as at ADI’s sale
date (taken as 30 June 1999). They divided the employees into three age groups
and calculated their positions at retiring ages of 55, 60 and 65.
The 36 employees aged 55 or more who had entered
the CSS after 1 July 1976, were likely to be in detriment and would not be able
to buy their way out. This means they would not have accumulated sufficient
CSS and new ADI cash benefits as would have applied had they retired as a
member of the CSS at their selected retirement age. ‘Of the remaining 111
potentially affected members, 65 are likely to be worse off at age 55, 48 are likely
to be worse off at 60, and only 23 likely to be worse off at 65’.
ADI sought the approval of OASITO and the
Government to allow the remaining 36 employees to stay with the CSS. The
Government, however, rejected the proposal. In its reply to ADI of 1 June 1999,
The policy departments are unable to support ADI’s proposal to
establish a ‘virtual CSS’ arrangement and consider that such an arrangement has
the potential to compromise the Government’s principles that guide
privatisation initiatives from a human resource management policy viewpoint.
- maximising return to the Commonwealth;
- minimising the transfer of Commonwealth employment conditions and
any associated higher employment costs to the private operators; and
- maximising the future commercial viability of, and employment
flexibilities available to, new operators.
Mr Hutchinson emphasised that ‘there was nothing
unique’ in the process adopted by the Commonwealth in regard to ADI. It was the same as that
followed for every other fully privatised government business enterprise. He
explained that after a government entity passes to private ownership, employees
are no longer eligible, by law, to be members of the Commonwealth or Public
Sector Superannuation Schemes. Their employers are required to put in place
alternative superannuation arrangements.
Mr Hutchinson stated that Commonwealth
superannuation arrangements for ADI staff offered ‘no financial disadvantage’
as, although no future benefits would accrue, the accumulated entitlements of
employees would be met.
Mr Hutchinson also told the Committee:
In terms of their future, their position is governed by their
relationship with ADI and the relationship that ADI as the new owners establish
for their industrial relations and staff management arrangements. If ADI were
to offer these employees an Australian workplace agreement, then that
arrangement would have to pass the no disadvantage test.
As I understand it, the employer would advocate it. That no
disadvantage test would then look at the arrangements that are on now and the
arrangements that are offered to them and say, ‘As a whole, do these
arrangements pass the no disadvantage test?’ It would not just be line by
line, nor is the superannuation, the leave, and the pay the same, but as a
whole the new deal is no disadvantage. That is what we had expected and expect
to see happen because of the application of industrial relations law and
On 4 January 2000, OASITO provided further
written advice to the Committee on options available to ADI’s CSS members.
This information is contained in Appendix 3.
It is clear that ADI’s CSS members were required
to leave the CSS when ADI was sold to Transfield Thomson-CSF. It is also clear
that the Government will not make any special arrangements for those CSS
members disadvantaged by the forced change in their superannuation
arrangements. The former Managing Director of ADI, Mr Harris, best summed up
the position when he said, ‘I do believe in any situation like this that if
individuals are disadvantaged then it is the responsibility of the people
running it to redress that disadvantage. I have always felt that.’
The Committee believes that there is an issue of
equity to be addressed in this matter. As pointed out in evidence, if
employees of ADI were to be offered workplace agreements, the no disadvantage
rule would apply to their overall terms and conditions of service. In light of
the evidence given by Mr Hutchinson and Mr Harris, referred to above, the matter
now rests in the hands of the new ADI management to ensure that those former
CSS members are not disadvantaged overall, even if their superannuation
arrangements are less beneficial than they were before the sale of ADI.
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