The Co-operative Bank did not have the management capability, nor the capital, to purchase 632 Lloyds bank branches, according to its former deputy chair.
Rodney Baker-Bates made his views about the risks of the deal known to senior executives and directors of the Bank and Group over a period stretching from 2011-2012 in a series of emails, which were released by the Treasury select committee investigation into the collapsed deal.
In a message to co-deputy chair, David Davies, on the project (also known as Project Mars), he said: “I am pessimistic about the returns that banks will earn over the next decade. They will be under constant pressure to hold more capital; liquidity etc, and with ring fencing, the market could become a lot more competitive given the relatively small size of the UK market.
“I feel strongly we do not have the capability to run the enlarged Co-operative Banking Group. There is considerable concern/worry with the executive team of the risks being taken.”
He added that even if the branches were received at “no cost”, he couldn’t support the deal.
In other evidence submitted to the committee, Neville Richardson, former chief executive of the Bank, told former chair Paul Flowers and Mr Baker-Bates that the running of Verde – alongside the integration of Britannia and a bid to merge functions of the Group and Bank – would “cause management and staff to be overloaded”.
Mr Baker-Bates told Mr Flowers and others: “Our current management is clearly stretched managing the existing business, and in parallel completing the Project Mars transaction.”
After a joint meeting with the Co-operative Group main board, Mr Baker-Bates sent an email outlining further concerns to Peter Marks (former CEO), Len Wardle (former Group chair), Paul Flowers, Moira Lees (former Group secretary) and David Davies.
In criticising analysis from the advisers, he said: “The advisers’ core approach to the valuation of this opportunity is built around a multiple of book value at acquisition and forecast forward against purchase price, which is standard for banking acquisitions or mergers. This is critical to a plc which is issuing shares/debt and understanding the market’s likely valuation of the acquisition against future earnings and the current share price and future growth. However, as a mutual, our priorities are very different.”
He added that the key issue that greatly concerned him is affordability – and the fact that analysis put forward did not “answer the fundamental question whether the Group can afford the price and if it should make an offer what price the Group can afford and with what protections.”
He confided in Group director Ursula Lidbetter, who is now chair, by saying “it is comforting” that a colleague on the Group board shares his concerns on Project Mars.
While the deal was being discussed, Mr Baker-Bates outlined a number of his concerns in October 2011 and later in July 2012, which included the “limited grasp of the detail” that chief executive Peter Marks had, plus the “lack of understanding of business” and banking around the Group board table.
The continuation of Project Verde was passed by the Bank board in July 2012 on a majority of 12:2, with Mr Baker-Bates and Mr Davies in opposition. Before the Group board had the final say, he warned Group board director Ms Lidbetter that “what is certain is that if/when Project Mars completes, banking will dominate the Group financially (if not in the eyes of the ordinary member). It will change the nature and direction of the Group irreversibly and I believe will force the exit from food over the next decade.”