Chapter 3 - The Australian Submarine Corporation and the Sale of ADI
Exclusion of the Australian Submarine Corporation (ASC)
The decision not to offer the ASC for sale with
ADI Limited was raised in the inquiry. As noted above, OASITO had determined
early in the sale process that it would not be advantageous to sell ASC with
ADI. Accordingly, when the proposed sale of ADI was announced on 12 December
1997, the Government stated that it would defer, until the second half of 1998,
consideration of the Commonwealth’s shareholding in the ASC. The decision was based on a
number of factors.
The ASC had been established to develop and
construct, as a prime contractor, six Collins class submarines for the
Australian Navy. Kockums Pacific (a subsidiary of the Swedish Celsius group)
held 49 per cent interest in the company while the Commonwealth, through the
Australian Industry Development Corporation (AIDC), owned 48.45 per cent. The
remaining 2.55 per cent was held by RCI (a subsidiary of James Hardie
The shareholder arrangements were an important consideration in the
Commonwealth’s belief that inclusion of the ASC in the ADI sale would both
lengthen the sale process and detract from ADI’s saleability.
OASITO submitted that market research on the
preferred model for sale of ADI and the ASC conducted during the scoping phase
had revealed that: ‘There was no commercial rationale or market interest in
acquiring a merged ADI/Australian Submarine Corporation’. Mr Harris said that ADI had
assessed the feasibility of acquiring the Government’s equity in the ASC, and
had judged that most of the profit in the company had already been taken up by
investors, leaving ‘a huge amount of risk’.
Even before the ADI sale process began, the
Collins class submarine was experiencing serious problems. The submarine
project was eventually subject to an inquiry, the report of which (June 1999)
confirmed serious design flaws requiring costly rectification. Debate about the submarine
project had shadowed the sale process, contributing to the Commonwealth’s
decision not to complicate the sale of ADI by including ASC. 
The Committee sought information about any
approaches made to OASITO to include the ASC in the tender. Mr Hutchinson told
the Committee that no unsolicited bids had been made for the ASC. This was in
contradiction to newspaper reports suggesting that major tenderers Tenix Pty
Limited and Transfield Thomson-CSF had both done so. Mr Hutchinson told the
Committee that interested consortia did consider possible options for the ASC
in their bids but none suggested that they would improve their bids for a joint
sale, and nothing so formal as an ‘unsolicited bid’ had been received.
The Committee noted Mr Hutchinson’s reply that
no bids had been received for the ASC. It then sought to establish whether
there had been any unsolicited expressions of interest in the ASC. Mr
Hutchinson said that an unsolicited expression of interest had been received during the expressions of interest
phase, but the Government judged that the party was not sufficiently informed
about the risks entailed in their bid at that point. The bid from that party
was, therefore, not taken forward.
Mr Ian King, Director of Baring Brothers Burrows, clarified this, saying:
‘during the expression of interest phase you cannot stop unsolicited requests
to buy all sorts of assets. We had quite strange requests to buy ADI from all
sources and that includes ASC...our role was to assess whether there was any
serious interest in it, and I think the answer was no’.
Tenix confirmed that it did not make an
unsolicited bid for the ASC.
Transfield Thomson-CSF told the Committee that
it had included an unpriced offer for the ASC in their proposal to buy ADI, but
this was subject to certain conditions. These related to the need to sort out
the current contractual issues surrounding the Collins project and to clarify
the pre-emptive rights that the Swedish shareholder Kockums has over the
Commonwealth’s shareholding. The final proviso was that Transfield Thomson-CSF
would only be interested in the ASC if it could obtain fifty per cent
Mr Shepherd regarded the Commonwealth’s minority ownership in ASC as a problem.
He said that ASC’s inclusion in the ADI sale would have lengthened the process
and made it more complicated.
SECA’s interest in the ASC
The Committee was told that Systems Engineering
Consortium of Australia (SECA) expressed an interest in acquiring the ASC along
with ADI, although it did not ultimately make a bid for ADI. The Chairman of
SECA, Dr John White, had previously put together Australian Marine Engineering Consortium, which purchased
the Williamstown naval dockyards in 1987. The dockyards were subsequently
bought by Transfield, which restructured them into a profitable enterprise.
SECA’s vision for
ADI, based on the Williamstown model, was for it to become ‘a premier
technology company’, supported by a strong Australian SME network. SECA had recruited Celsius, the Swedish parent company to Kockums
and co-owner of the ASC, into the consortium with the intention of integrating
shipbuilding interests into ADI, so creating a consolidated and predominantly
Australian-owned defence industry.
Dr White elaborated on his vision for a combined
ADI and ASC, saying that the Australian defence industry needed consolidation
so as to compete in the international arena. SECA had secured the support of
Pratt’s Visy industry group (30 per cent equity stake), the Australian National
Bank (20 per cent equity) and incorporated Celsius on the clear understanding
that they would ultimately consolidate their 49 per cent share in the ASC with
ADI in majority Australian ownership.
acknowledged that the partnership with Celsius singled out SECA among other
contenders in its desire to acquire the ASC:
Whereas the other bidding
parties had expressed general interest in being involved or consulted or
accommodated in whatever the Commonwealth in the future decided to do in
respect of the ASC shareholding, of those who were on the list after the expressions
of interest stage SECA was the most aggressive in pursuing and indicating a
linkage to its interests in ASC.
In early November 1997, Dr White had expressed
his hopes that ADI and the ASC would be offered for sale together saying:
The Federal Government’s sale of ADI and its shares in the ASC
is a unique opportunity to create a strategically important ‘smart’ Australian
company that can work across defence and civilian markets.
Dr White told the Committee that, in 1997, prior
to ADI coming on the market, SECA had offered an unsolicited bid for ADI, at a
book value of $320 million, on the condition that it could purchase the
Government’s shares for the ASC at book value in return. Dr White stated that, after
the Government announced its intention to sell ASC and ADI separately, SECA
made a commercial decision to approach Celsius.
The viability of the SECA bid therefore hinged
on the continued commitment on the part of the Celsius group. The basis of the
agreement was that, having secured ADI, the consortium would work to
consolidate the ASC into it.
However, evidence revealed that the arrangement between the two was predicated
on agreements being made with the Commonwealth that Dr White had hoped to
secure prior to bidding.
The Committee sought to clarify these
agreements. Mr Hutchinson explained that there were two aspects to SECA’s
request, made on 30 March 1999. The first was a standard request to vary the
membership of the consortium from that declared at the expression of interest
phase on 30 July 1998.
The Committee was told that the first request was never finalised because the
related second request, which involved the guaranteeing of certain consents and
waivers, was not granted.
SECA proposed that the Commonwealth would
guarantee that SECA could become fifty-fifty shareholders in the ASC with the
Celsius vehicle, KPAC-Kockums Pacific Australia, building on its 49 percent
holding and SECA claiming the AIDC’s shares.
The ultimate aim of the request was that the Commonwealth would support this
amalgamation as a new company called the Australian Naval Corporation Pty Ltd.
Meanwhile, SECA would be collectively owned by a number of parties, including
30 per cent by Celcius.
As OASITO explained, acceptance of this rested
on the second aspect which would have required the Commonwealth to agree not to
exercise its pre-emptive rights under the Collins class submarine contract and
also that the AIDC would agree not to exercise its pre-emptive rights in
connection with equity in ASC. On this basis, and despite the fact the
agreement would only be activated if SECA were selected as the preferred
purchaser, Blake Dawson Waldron advised the Commonwealth not to give consent.
Mr Hutchinson told the Committee:
SECA’s application was
rejected mainly on legal grounds. It would have been inappropriate to agree in
advance of bid receipt and assessment to unsolicited proposals and conditions
put to the Commonwealth in the context of the sale. The Commonwealth legal
advisers warned that accommodating such an approach at that stage could have
threatened the legal basis and integrity of the sale process.
He further explained that this was because any
decision drawn on the matter would have called into consideration elements of
the evaluation criteria set for the sale. These related to industry development
and future industry structure. It was considered inappropriate to make
judgement on these outside, and especially, in advance of the sale process. In
essence, it would mean that the Commonwealth ‘would be making bid related
decisions for one party on matters that the other parties had not been given
the opportunity to have considered’.
Mr William Conley, Managing Partner of Blake Dawson Waldron, confirmed Mr
Hutchinson’s summation noting, in particular, that:
there were industry issues
which went to the heart of the application by way of the proposal of the SECA
consortium which were the very issues, by way of evaluation criteria, all
bidders were being asked to address in their bids, which were due on 30 June, and
here we were in April, being asked to consider those very issues on behalf of
Dr White had expressed concern that OASITO had
engineered the rejection of SECA’s proposal, independent of prior approvals
gained from Defence.
Mr Hutchinson emphasised that the decision made against the proposal and
correspondence about it was issued as a collective Commonwealth response, and
not just that of OASITO, despite the latter’s obvious responsibility as manager
of the sale process.
OASITO also emphasised that SECA had been told that the decision had been made
‘without prejudice’ to SECA’s proposal being subject to ‘proper and
constructive assessment’ at the appropriate time, that is, at the time of bid
Mr Hutchinson told the Committee that it was
OASITO’s perception at the time of the request for the ex ante arrangements
that they were being sought in order to keep the SECA consortium together. On
the basis of Dr White’s evidence, OASITO drew the conclusion that: ‘Celsius had
been able to use the absence of the ex ante approvals to exercise an option to
leave the consortium prior to bidding’.
It is reasonable to assume that the failure to gain advance security for future
development plans was a catalyst to Celsius’ withdrawal from SECA.
Financial Review of 14 May 1999 reported that, earlier in that month,
Celsius had shocked the Swedish stock market by recording losses of $1.6
million. These resulted from severe cutbacks in defence spending by governments
globally, also leading to mergers in the industry. Celsius was said to be keen
to consolidate its place in the Europe by the teaming up with other European
firms. At the same time, however, Celsius President Lars Joseffson, commenting
on the break-up with SECA, said that this was because of ‘very different
commercial judgements on a very central issue’.
The Committee was satisfied with the
explanations received from OASITO and its advisers on SECA’s request of 30
March 1999. It was, nevertheless, disappointing that SECA withdrew from the
sale process, thereby reducing the number of bidders for ADI and weakening the
process. It would have been a more commercially robust process if more of the
original short-listed consortia had remained in the sale process and lodged
bids for ADI.
Alleged interest by Electric Boat in the ASC
The Committee sought to establish whether
Electric Boat, an American submarine company, had made any approaches to OASITO
about the ASC and whether it was being advised by Baring Brother Burrows (or
any related company).
The Committee asked OASITO:
if ING made any representations to OASITO in the early part of
the sale, when there were expressions of interest, or later, on behalf of the
Electric Boat company, the [American] submarine company.
Mr Hutchinson replied:
We know that they did not make any representations to OASITO at
all. I cannot recall having heard from ING other than through their Baring
Burrows subsidiary here in Australia.
The Committee asked ‘did any company act on
behalf of Electric Boat in making representations or unsolicited bids in
respect of the Submarine Corporation?’ Mr Hutchinson replied that he had ‘no
recollection of an unsolicited bid at all’. When prompted about ‘any
expressions of interest’, he replied ‘The unsolicited expression of interest
that arose during the pre expressions of interest stage was not to my knowledge
traceable to Electric Boat, to Barings or to ING’.
Mr King confirmed
that Baring Brothers Burrows is 50 per cent owned by ING, and that the two are
effectively the same business entity.
Asked whether the ING had represented Electric Boat at all, Mr King stated that
he ‘had no knowledge of that’. Mr Hutchinson also confirmed that the ING had
not made any representations to OASITO on behalf of Electric Boat.
written answers to questions taken on notice at the hearing on 29 November
1999, OASITO advised that ‘Electric Boat has never been a client of Baring
Brothers Burrows’ and ‘Preliminary inquiries have been undertaken of the global
client data base of ING Barings, which indicate that Electric Boat is also not
a client of the group’.
On the basis of
the explanations received from OASITO and its advisers, the Committee is
satisfied that Electric Boat had not approached OASITO directly or indirectly
about any interest it might have in the Australian Submarine Corporation. On
the same basis, the Committee is satisfied that Electric Boat was not a client
of Baring Brothers Burrows or any related entity. Baring Brothers Burrows could
not, therefore, have had a conflict of interest by advising both Electric Boat
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