The œ600 million nest egg

Wimpey and Tarmac were transformed by the œ600 million asset swap which took place last year. At a stroke, it gave both organisations a nest egg to draw on in the future, securing instant dominance in their target markets of housing, construction and minerals.

But while the commercial logic was simple, the mechanics of the deal were not. They required massive legal problems to be overcome.

Solicitor Richard Godden looks back on his role in the œ600m Tarmac/ Wimpey asset swap with a mixture of weariness and elation. "At 4pm on the day we signed the deal there were still five significant outstanding issues on my checklist," remembers the Linklaters & Paines partner. "One or two more arose before we signed a few minutes from midnight. A lot of major issues went right to the wire."

The first chapter in the swap story began almost exactly a year ago. On 2 August 1995, Simms stuck a "for sale" sign on Tarmac's housing business, Britain's fourth largest. At this point, Linklaters, who had acted for Tarmac on a number of its major corporate transactions in recent years, were instructed to handle the sale.

Ten days after Simms had put Tarmac's housing business on the market, he received a phone call from Wimpey chairman and chief executive Joe Dwyer.

For decades Tarmac and Wimpey had sat at the top of the construction tree slugging it out. They had competed for the title of Britain's biggest housebuilder, a title snatched from Wimpey by Tarmac in the 1980s. On the contracting side, the firms had done battle on the tenders for many of Britain's best known building and civil engineering projects. Those decades of rivalry were about to come to an end in the most astonishing way.

He proposed a deal in which Wimpey would acquire Tarmac's housing arm. In return Tarmac would take on Wimpey's mineral businesses. In one go, Tarmac would achieve its aim of quitting housing, while investing in minerals. Wimpey meanwhile would instantly capture the coveted number one housebuilder's spot, becoming twice the size of its nearest competitor.

In effect both companies would become highly focused, their size helping them dominate many of the markets in which they were best known and most successful. They would also be returning to their roots. Wimpey had risen to prominence under Sir Godfrey Mitchell as a housebuilder in the 1930s, while Tarmac only entered the housing market in 1974.

The swap was a beautifully elegant solution, but could it be made to work?

During the initial discussions it was decided that Wimpey's contracting arm would become part of the deal. Tarmac had concluded that housing for minerals was not a fair swap, Wimpey would have to offer something extra.

"Wimpey were determined that their folk, mainly commercial people rather than lawyers, should really understand what was going on", remembers McKenna partner Paul Ellington, who acted for Wimpey. Tarmac's approach was a world away. "My instructions were basically: 'complete the deal'", says Godden. The different roles handed to the lawyers by Tarmac and Wimpey proved to be a source of some tension during the deal.

Both sides were often baffled as to how the other was running their part of the deal. Much of this tension centred around concerns that Wimpey was not resourcing the deal adequately, or that Tarmac was dragging its feet.

The negotiations were also marked by the Wimpey side becoming increasingly exasperated by what it saw as Tarmac's nit-picking.

Certainly there were those in Wimpey who saw Linklaters high profile role as threatening, and viewed Richard Godden as something of a bogey man. They believed Wimpey could have done the deal more quickly were it not for Linklaters persuading Tarmac to challenge almost every point.

Wimpey and Tarmac were originally looking to complete the deal by the end of December, some two months before it was actually accomplished. It soon became obvious that this was much too ambitious, because of what Ellington describes as: "the weight of complication that was thrown at the deal."

Most of this "complication", according to Ellington, was inspired by Tarmac which, "put more weight on cautious ascertainment of fact, while Wimpey emphasised the original intention (of getting the deal done as quickly as possible)".

When the heads of the agreement were signed there was an apparent understanding in the Wimpey camp that Tarmac was prepared to "take a flyer" on some issues in order to get the deal done as quickly as possible. For this reason they became increasingly irritated by what they saw as Tarmac's painstaking approach.

Godden accepts that Tarmac's approach was "careful", but says there were good reasons for this. "Taking a flyer when buying a housing business, and taking a flyer when acquiring minerals and contracting businesses are two completely different things. We never thought Tarmac could take such a risk, I find it hard to believe that Wimpey or its advisers did either. Tarmac wanted to understand the facts in detail, hence the exhaustive due diligence. Until it understood a situation, it adopted a cautious approach, but once it understood, it was prepared to accept risk without further argument."

In terms of delay, Godden points the finger at disagreements over the way the completion accounts should be handled. "This was the single biggest headache", claims Godden, "it cost us perhaps three weeks."

Perhaps the fairest interpretation of the way the deal was handled is provided by Ellington: "Each side probably felt it handled the transaction better than the other side, largely because they handled it in the way which best suited them."

"Both sides put enormous importance on a fairly quick transaction", says Ellington. "There were huge personnel anxieties on both sides. There was a belief that only by a quick and certain agreement could they keep staff loyal and get the thing decently negotiated.

Godden is insistent that calming the fears of Tarmac and Wimpey employees, where possible, was a major part of his brief.

"I've always believed that lawyers working on one of these big deals can be a great source of concern, alarm and unsettlement, or the reverse. As a result I was constantly emphasising to our team the need to make sure people felt comfortable. I chose my team partly on their ability to do this.

"I was determined the Wimpey and Tarmac people who came into contact with the Linklaters team would feel they could talk to us. I didn't want them to think we were the nasty City professionals coming in to hatchet the certainties within which they survived," adds Godden.

"The Wimpey group had to be restructured", says Ellington, "because it wasn't in the neat packages that we were about to sell. We had to reorganise the whole group so that the businesses being sold fell with a distinct company whose shares could be transferred to Tarmac."

There had been little time to remedy this situation before the signing of the agreement, and Wimpey was reluctant to restructure before they had at least a conditional obligation from Tarmac.

Parts of the business Wimpey was to keep were "tied up" with the Minerals division. These had to be separated, along with the "dead or dormant" subsidiaries of Wimpey Minerals and Construction, from the sale in a way that avoided tax penalties.

In all 25 companies had to be "moved" before the sale could take place. The swapped assets included around 60 businesses.

Linklaters' held a watching view on the Wimpey reorganisation.

"Our view was that we were never going to have the detailed knowledge which would have enabled us to tick off every stage of the reorganisation", says Godden. "Instead, we produced two charts. The first showed our understanding, based on the due diligence, of how the two Wimpey businesses were structured before the swap. We then asked Wimpey to confirm that our understanding was correct. The second chart showed the structure of the companies we wanted to buy. Finally, we made sure the contract stipulated that there would no liabilities in moving from one corporate structure to the other."

One of the biggest threats to the deal was that somebody would appeal to the Office of Fair Trading over the concentration of the housing or minerals businesses. The swap partners believed they were on a good wicket, given the need for rationalisation in the industry, but they took no risks.

"We deliberately did not file a merger notice which sets the 20 business day time limit running," explains Godden, "because we did not want the regulatory authorities to feel under any pressure. We felt that the longer they had to look at it, the more likely they were to decide in our favour."

The lawyers' hardest task was helping develop a formula which would allow the net assets of each business to be established.

Undertaking this gave rise to the "dreaded" Schedule 10 agreement, described as a "rabbit warren of complexities" and "the most expensive document in the world".

The heads of the agreement stated that businesses to be swapped should be considered of equal value if their net assets as 31 December 1995 were equal. Commonly in such a situation the normal practice would be to produce completion accounts with a balancing payment if the equation did not quite produce an equal value for the swapped assets. In the end this was what happened, but only after a considerable struggle.

For a start Wimpey claimed that the heads of agreement did not call for completion accounts and that the parties were simply going to rely on each others audited figures. Tarmac argued that the heads stated that the audited accounts would only be the "starting point" for the compilation of the completion accounts.

The next problem was that the scope for disagreement on the completion accounts of Wimpey's mineral and contracting business proved to be enormous. Wimpey was concerned that the difficulty in valuing the businesses would mean that once the completion figures were produced, Tarmac would launch appeals against almost any provision. And Wimpey's reluctance to provide completion accounts only increased Tarmac's suspicions that its partner was trying to hide something.

The heads of agreement stated that audited accounts would be available by 1 February. This proved impossible for the two Wimpey businesses. A solution was found by producing drafts of all the completion figures for the two Wimpey businesses. Tarmac was allowed to study these in depth, on the basis that it could only appeal if these "interim" figures did not correspond with the finalised completion accounts.

Producing the drafts was not easy. The swap partners and their legal teams were not allowed to make adjustments which would second guess construction valuations at the year end. As Ellington says: "most issues of judgement which are crucial to accounts were excluded from that process."

The final twist in the convoluted tale of Schedule 10 is that the delays actually meant that, towards the end of the negations, audited accounts did start to become available. This played a large part in giving Wimpey and Tarmac the confidence to agree to the proposed solution.

l Alastair McLellan is a senior reporter for Commercial Lawyer. What was swapped?

From Tarmac to Wimpey

l 1995 turnover: œ521.2 million

l 1995 operating profit: œ38.3 million

l Housing units sold: 6,267

l Countries of operation: UK and USA

l Employees: 2000



From Wimpey to Tarmac

l Wimpey Construction

l 1995 turnover: œ704.3 million

l 1995 operating loss: œ4.4 million

l Regions of operation: UK, Middle East, Canada, Caribbean, Continental Europe and South East Asia

l Wimpey Minerals

l 1995 turnover: œ285.6 million

l 1995 operating profit: œ24.1 million

l Regions of operation: UK, USA, Canada, Eire, Czech Republic, Middle East and South East Asia

l Employees: 4000