BBC Broadcast may be sold by August

Report on meeting held 12 January 2005 to discuss the possible privatisation of BBC Broadcast Ltd, following Mark Thompson's review of commercial activity.

Summary

At the first meeting specifically devoted to the sale of BBC Broadcast, management outlined a process and timetable for the privatisation which would culminate in the company being sold by August 1 2005.

BECTU condemned the privatisation plan, and demanded that, if the sale went ahead, staff should have concrete guarantees on terms, conditions, pensions, and job security for the life of the company's contract with the the BBC.

Rationale for privatisation

In December 2004, Mark Thompson had announced that his review of commercial activities at the BBC had concluded that it was "not essential" for the Corporation to continue owning two of its subsidiary companies, BBC Broadcast and BBC Resources.

John Smith, the BBC's Chief Operating Officer, outlined to union representatives the detailed rationale for the privatisation of Broadcast.

He argued that although Broadcast was acknowledged to be a success, measured by its own profitability and the reductions in costs it had passed on to the BBC, the company's growth was being hampered by its status as a wholly-owned subsidiary.

Key problems faced by Broadcast included:

• External customers seeking to outsource their TV playout operations were being deterred by the company's BBC branding.
• As a result, Broadcast had not increased its workload as planned when it was first incorporated in 2002, with the explicit intention of winning external work.
• Although the company was currently profitable on BBC work alone, its new state-of-the-art centre at White City had been scaled to accommodate outside customers, and if they stayed away, prices charged to the BBC would rise, either directly or indirectly.
• Broadcast's ability to use flexible pricing tactics as a means of acquiring external customers was seriously restricted by the fair trading rules that it had to observe as part of the BBC.
• However, despite honouring these rules, complaints were frequently lodged with OFCOM from competitors who accused BBC Broadcast of exploiting the BBC's publicly-funded income to distort the commercial market. Remaining as a BBC subsidiary, while pitching for outside income, was becoming "too difficult".
• Broadcast was obliged to buy services in from the BBC, and participate in various corporate activities, at uneconomic rates, and would be able to reduce these costs if privatised. Examples given included the financial services supplied by MedAS, and the cost of sending managers on the BBC's leadership training programme.
• New capital funding would be required over the next few years - up to £60 million according to Smith - which could not come from the BBC's £350 million overdraft intended for its commercial subsidiaries, because the return would be too low.
• The company faces an overnight increase of roughly £3 million in its staff costs when the BBC's pension surplus runs out, possibly in 2006, and new income was needed to meet this commitment.

Taking all these factors into account, the BBC had decided that privatising the company would be good for the business, and good for the 1,000+ staff working in it.

Union representatives challenged several of these assertions, and questioned why a subsidiary that the BBC acknowledged to be profitable, and delivering savings, should be sold off.

The BBC acknowledged that there would be no further cost savings once the company was privatised, and played down the importance of the cash injection that would be raised from Broadcast's sale.

The union condemned the privatisation plan, describing it as a poor reward for staff who had worked hard since 2002 to make the company a success.

The move would undermine the concept of "one BBC", according to the union, and looked like a crude reduction in headcount to appease critics who claim that the Corporation is over-staffed.

Costs to the BBC would rise over time, predicted the union, whenever new services were needed from Broadcast - a predictable requirement as broadcasting moved into an interactive digital future.

Any problems to do with the lack of external work, and the burden of a new building scaled to cope with three times as much activity as the BBC needed, was the fault of management.

In 2002, it had been the BBC, not the staff of Broadcast, who made optimistic forecasts of a massive expansion in activity thanks to external customers. Doubts had been expressed at the time about the wisdom of Broadcast's commercial business plan.

Management replied by explaining that conditions had changed since 2002 - the fair trading climate had become tougher, the deterrent factor that the BBC's brand was having on prospective new customers had proved to be greater than predicted, and the capital funding problem had not been foreseen.

BECTU dismissed this explanation, noting that all these issues could have been predicted in 2002, yet the future of Broadcast's staff had been gambled on an undeliverable business plan.

Union representatives were also critical of the BBC's claim that Broadcast was suffering punitive overhead charges inside the BBC. One example quoted, the bill for financial services from MedAS, seemed illogical, since the private supplier had been set up by the BBC specifically to reduce costs.

Management claimed that privatising the company would solve several problems, and put Broadcast in a position where it would be better able to meet the projections for external customers that were built into the business plan.

According the the BBC, there were a number of large broadcasters actively considering the outsourcing of their TV playout operations, and Broadcast, with the biggest and most up-to-date centre in Europe, was in a good position to bid for this work. Management declined to reveal who these potential customers were.

There was now a new "planning horizon" for BBC Broadcast, which rendered irrelevant the company's proven two-year failure to win significant external programme playout work.

The external work that had come to the company since 2002, said the BBC, had been won on cost competivity and quality, and it was reasonable to predict that once the impediment of the BBC brand had been lifted from Broadcast, still more commercial contracts would be won.

When asked [later in the meeting] if the sell-off had anything to do with the move to Manchester of two children's TV channels, currently played out by Broadcast, management revealed that although programme staff would move north, playout of CBBC and CBeebies would remain in London.

Union representatives remained sceptical that Broadcast stood a better chance of fulfilling an over-ambitious business plan as a private company than it had done as a wholly-owned BBC subsidiary.

The process of sale

An advertisement inviting expressions of interest will be placed in late February 2005, after a process of due diligence has been conducted within Broadcast itself. This would include the BBC adopting a confidential guide price for the company. Implicitly, bids below this level would be ruled out.

Bidders would be judged against a list of criteria drawn up by the BBC, initially producing a "long" list of bidders. Further matching of bidders to the criteria would produce a short list, and by early June 2005 a preferred bidder is likely to be named.

Negotiations with the preferred bidder would then commence, and the BBC expects that by late July it will be in a position to seek approval for the sale from the Governors and the Department of Culture Media and Sport.

The company's existing contract with the BBC for TV playout, promotions, and access services like subtitling, which runs until 2012, will transfer to the new owners.

According to the BBC there is no need to go through the formal European procurement process for the public sector because the services offered by Broadcast are exempt. [This claim is being checked by BECTU's lawyers.]

Although management had not finalised the criteria which would be used to select the preferred bidder, the BBC emphasised that "people issues" including pensions would be important, and that a bidder with a good "cultural fit" would be sought.

Timetable for sale

Management outlined a detailed calendar as follows:

January 2005

• Finalise Sales Team
• Appoint external advisors
• Resolve outstanding issues of scope
• Start pre-sale due diligence

  February 2005
  

• Complete pre sale due diligence
• Prepare initial questionnaire and info pack
• Prepare Information Memorandum
• Place sale advertisement

  March 2005
  

• Send initial questionnaire and info pack to all respondents to the advertisement
• Evaluate first round responses and select long list of bidders
• Send Information Memorandum to long list and invite detailed bids

  April 2005
  

• Evaluate second round responses and select short list

  May 2005
  

• Enter into detailed negotiations shortlisted bidders

  June 2005
  

• Select preferred bidder - by early June
• Enter final negotiations

  July 2005
  

• Seek Governor and DCMS approval
• End of July Sign contract, (i.e. by 1/8/05)

Management were asked about rumours of a possible management buy-out (MBO) of Broadcast Ltd, and confirmed that venture capitalists were being canvassed as to their interest in backing a bid from the current management team.

John Smith, the BBC's COO, said that the Corporation would be "perfectly happy" with an MBO, because it would leave existing relationships and understandings in situ, offering greater continuity.

However, said the BBC, trade buyers were actively to be sought, and it could not be assumed that a management bid would necessarily win.

Is there an alternative to a sale?

BECTU reminded the BBC that when Broadcast had been incorporated in 2002, staff were told that the ambitious plan to acquire external customers was aimed, in part, at generating enough work to keep everyone in jobs. If Broadcast were to aim only for BBC work, changes in technology would lead to redundancies.

Given that background and the lack of success to date in winning external work, the union asked if the BBC had considered a "retrenchment" option, in which Broadcast would revert to doing BBC work exclusively?

Management responded by saying that the immediate effect of abandoning external work would be the loss of roughly £10 million in revenue for Broadcast (about 8% of turnover), and between 50 and 100 job cuts. Retrenchment had therefore not been pursued as an option for Broadcast, among other reasons because the BBC had anticipated union resistance to any job cuts.

However, BECTU declined to take a firm postion on the retrenchment alternative until members had been consulted, quoting the ealier sale of BBC Technology as an example where members had expressed a preference to stay inside the BBC, albeit with job cuts, rather than face an uncertain future with a new owner.

Union response to sale plans

BECTU reiterated the union's opposition to the sale, and planned to consult members about alternatives to the privatisation of BBC Broadcast.

The union demanded that the principles of TUPE (regulations that protect terms and conditions when employees are transferred from one company to another) should apply to the sale of Broadcast if it went ahead. Although this was not a legal requirement, due to the nature of the sale, TUPE had underpinned the sale of BBC Technology, and staff in Broadcast should be entitled to the same treatment.

Detailed demands on terms and conditions, if the sale went ahead, were tabled by the union:

• For the duration of the current BBC contract - until 2012 - there should be no changes in terms and conditions for Broadcast staff, and no compulsory redundancies.
• Any new owner would have to offer a final salary pension scheme for BBC staff, at least as good as the BBC's own.
• There should be no compulsory moves of base for staff.
• New staff employed to work in BBC Broadcast should be on the same terms and conditions as ex-BBC colleagues.
• BECTU should be recognised for collective bargaining purposes by any new owner.
• If the company was sold to a management buy-out team, staff should be involved, possibly through a share ownership scheme.

BECTU agreed to submit a full list of demands in writing after the meeting.

Next moves

BBC management agreed to meet the union again, at the very latest in February before an advertisement was placed offering Broadcast for sale.

Meetings of union members in the company will take place in late January and early February.