Health Policy InsightEditor’s blog Thurs 9 Sept 2010: EXCLUSIVE – Dr Foster’s DFI shareholding ‘put option’ can make DH buy its stake at market value
You may remember my previous exclusive about the £8 million sale of the Information Centre’s stake in Dr Foster Intelligence to Health Secretary Andrew Lansley on 9 July.
I got this story not through genius, contacts or bribery, but by reading a long annual report. So it goes.
Always read all the way to the back
Like a fool, I still fail to heed my own advice on health policy documents: always read the bit at the back, thoroughly.
Because reading to the back of the Information Centre’s 2009-10 Annual Report reveals more crucial information about the deal that created DFI in 2006.
DFI’s falling profits and static value
Go to page 50 of the IC Annual Report 2009-10, to be reminded that Pricewaterhouse Coopers (PwC – who, coincidentally, are also the IC’s own internal auditors) valued Dr Foster Intelligence at £12 million at the end of the 2007-8, 2008-9 and 2009-10 financial years.
You will also be reminded that the one-year drop in turnover from £19 million to £10.5 million between YTDec 2008 and YTDec2009 hit DFI’s profits, which fell by more than half from the already-modest £1.3 million to £600,000 million. Which matters because contractually, the public sector gets half of DFI profits.
Given this falling profitability, PwC’s static £12 million valuation of DFI as at 31 March 2010 looks puzzling to a non-financial expert.
The ‘put’ option
Go to page 53 of the IC Annual Report 2009-10, and under ‘Section 14 – Contingent Assets And Liabilities’ you will learn that Dr Foster LLP established a ‘put’ option with the Information Centre regarding the Dr Foster LLP shareholding in joint venture Dr Foster Intelligence.
This means, as the IC’s 2009-10 Annual Report states, that ”The joint venture contract includes a put option whereby, if anytime from 1 January 2009 to 31 December 2013, Dr Foster LLP shareholders wish to sell their shares in the joint venture, the IC would be obliged to buy out their share of the business, at market value, if no other buyer can be found”.
The IC shareholding has been sold (the IC prefer the word "transferred") to the DH. So the same applies. Dr Foster LLP can make the DH buy them out of the decreasingly-profitable Dr Foster Intelligence at the (PwC) agreed market value if they want to sell and if no buyer can be found.
This looks like another far-from-brilliant deal from the public sector's point of view. Just like the ISTC 'take or pay' deals; the NHS being obliged to buy ISTCs after contracts; polyclinics with very few patients; PFI risk transfer ... Heads you win, tails we lose.
Incomes and outgoings
Go to page 54 of the IC Annual Report 2009-10 and you will see that the IC received £59,000 in income from its JV partner Dr Foster Intelligence, and spent £2,105 million on its JV partner Dr Foster Intelligence.
Do you find all of this somewhat curious?
Correcting the first story
Making an FOI request to the IC about this (which appears below), I found out that information I'd been given by Dr Foster staff which appeared in the previous story was incorrect. That story has now been updated to correct the inaccuracy.
The person describes it as a genuine mistake, and I'm wiling to believe him. It related to the £8 million return of cash, or capital reduction, to shareholders on 1 April 2010 (£4 million for the IC; £4 million for Dr Foster LLP) that was covered in the first story.
This return of cash / capital reduction is entirely separate to the shareholders' agreed writedown of their DFI shares to recognise Dr Foster Holdings' sale of Dr Foster Research to Dr Foster Intelligence on 1 April 2010.
What the Doctor says
The statement from Dr Foster in reply to my queries about the 1 April 2010 capital reduction / return of cash reads, "On the 1 April 2010 Dr Foster Intelligence undertook to complete a capital reduction totalling approximately £8,000,000. This was shared jointly between the shareholders meaning the IC received a total capital reduction of £4,000,000.
"The capital reduction is a way of taking cash out of the business and returning it to the shareholders. To do this the shares are either reduced in number or value. This happened on the 1 April and £8m in cash left the business and was distributed equally to the shareholders (50/50 as is the IC’s shareholding at that time). The reason this was done was because the shareholders asked for it to be done.
"On the same day a separate deal was done to buy DFR which involved creating a separate category of shares – with no voting rights – agreed to by all shareholders which nominally decreased the IC’s shareholding by a percent and increased the LLPs shareholding by a percent – although the voting rights/control remain at 50/50 even split. Dr Foster Intelligence, through that purchase, became a stronger company with wider interests such as the soon to be launched International Project as well as work in local Government. The reason shares were used was because the owners of DFR (Dr Foster LLP) wanted to encourage an ongoing interest in the business rather than a one-off cash payment.
"There has not been a dividend paid since the joint venture was incorporated".
Let me repeat the important bit of that: "The capital reduction is a way of taking cash out of the business and returning it to the shareholders ... The reason this was done was because the shareholders asked for it to be done".
The IC’s FOI reply
The NHS Information Centre replied to my FOI request, which followed my original exclusive about the aforementioned story.
My questions (in bold italics) and their answers follow below.
1. Please provide me with a copy of all correspondence regarding the IC’s sale of its stake in Dr Foster Intelligence to the Secretary of State for Health, including external financial valuation and legal advice.
"We estimate that undertaking a search for the information you have requested under this question would take one individual at least 10-12 days to complete (this includes retrieving and extracting the information). The cost of this would therefore exceed the appropriate limit of £450 as set out in section 12 of the FOI Act".
"You are of course entitled to request a refinement of your request (in terms of timing and scope) which we will be happy to consider. However, I should stress that we cannot guarantee that we will be able to meet your request in full under Section 43 (1) exemption (Commercial Interest)".
2. Please confirm the costs incurred in seeking external advice on this deal and whether these were reimbursed by the DH of Secretary of State.
"No identifiable costs were incurred by the NHS IC in seeking external advice on this deal".
3. Please also confirm the tax treatment of the sale of this stake in Dr Foster Intelligence, including whether capital gains tax is payable and whether any tax avoidance measures have been used.
"The NHS IC's stake in Dr Foster Intelligence has not been sold; it has been transferred from one part of DH to another. There is no tax implication for the NHS IC".
4. Please also provide me with an unredacted copy of the original 2005-6 agreement between the Department of Health/Health and Social Care Information Centre and Dr Foster.
"You were provided with a redacted copy of the agreement on 30 May 2006. At that time we were unable to release an unredacted copy under Section 43(2) exemption (Commercial Interest), and this position has not changed. The reasons for non disclosure set out in the Public Interest Test carried out in May 2006 remain the same.
"In accordance with section 17 of the Freedom of Information Act 2000 please treat this letter as a refusal notice".
5. Please release all documentation on the carrying valuation of Dr Foster Intelligence £12 million agreed by the IC board and supported by your internal auditors PriceWaterhouse Coopers, as mentioned on page 23 of the Annual Report.
"The contents of the documentation on the carrying valuation are commercially sensitive and Section 43(2) exemption (Commercial Interest) applies.
"A Public Interest Test has been carried out, which confirms the use of the Section 43(2) exemption (Commercial Interest) as release of the information is likely to damage the commercial interests of DFI and several other unrelated commercial organisations
"A Prejudice Test has been carried out, which confirms the use of the Section 43(2) exemption (Commercial Interest) as release of the information is likely to prejudice the commercial interests of DFI and several other unrelated commercial organisations.
"In accordance with section 17 of the Freedom of Information Act 2000 please treat this part of the letter as a refusal notice".
6. Please confirm whether you have in this calendar year struck any further financial arrangements with any Dr Foster company, including but not limited to Dr Foster LLP, Dr Foster holdings, Dr Foster research or Dr Foster Intelligence.
"No further financial arrangements have been struck by the NHS IC with any Dr Foster company, including but not limited to Dr Foster LLP, Dr Foster holdings, Dr Foster research or Dr Foster Intelligence.
"Please note: Day to day trading with all related parties up to 31 March 2010, including but not limited to Dr Foster LLP, Dr Foster holdings, Dr Foster research or Dr Foster Intelligence is set out on page 54 of the NHS IC's annual report and accounts 2009/10".
7. Please confirm the tax treatment of the £4 million cash dividend paid to the IC by Dr Foster Intelligence in April 2010, including whether capital gains tax is payable and whether any tax avoidance measures have been used.
"There is no cash dividend involved. The £4m was the NHS IC's share of a capital reduction. There is no tax implication for the NHS IC".
So. The IC would like me to believe that:
- it’s all too time-consuming to get the documents;
- they are part of the DH;
- and that there is a ‘commercial in confidence’ FOI non-disclosure defence relating to to shares they no longer hold in an organisation which will face commercial competition according to planned government policy.
Interesting.