1.34 Figure 14 summarises how the Department and their advisers assessed the final bids from the Airline Group, Nimbus and Novares against the Government's criteria. The Ministry of Defence and the Security Service reported no adverse security or intelligence issues in relation to the companies making up the three bidding consortia. The Civil Aviation Authority reported that, although each bid had different strengths and weaknesses, all three were acceptable from a safety perspective. The Department received some less positive comments about Nimbus from an advisory group to NATS. As the Department considered that its own and the Civil Aviation Authority's investigations were much more comprehensive, the advisory group's comments were not given any weight in the evaluation of bids.
1.35 As referred to in paragraph 1.20, the Airline Group revised their traffic forecasts down, leading to initial proceeds being reduced from £845 million to £758 million, plus deferred proceeds estimated at £21m by CSFB. The Airline Group's bid remained higher than the Department's valuation of the final Nimbus bid at £750 million. Nimbus had sent the Department an unsolicited letter on 20 June 2001, confirming that their offer still stood. Figure 14 shows the Airline Group's advantage over Nimbus in terms of proceeds and the contractual terms attached to their bid. It also shows that their bid was less financially robust than that of Nimbus although the Department had emphasised their aim of minimising the risk of potential recourse to shareholders in the future whilst maintaining an appropriate investment plan.
1.36 CSFB advised the Department in February 2000 that to ensure NATS the maximum flexibility to raise ongoing finance on optimal terms, the PPP should target an agency credit rating of single "A" (which was the investment grade rating of most UK public service utilities). Based on NATS' business plan at the time, CSFB estimated that the maximum debt level that NATS could tolerate to achieve this rating would be £420 million. Subsequent forecasts produced by NATS and the bidders (once the price cap regime for the first five years and the Long Term Investment Plan were more progressed) indicated that NATS would generate a much higher level of cash flow - thereby raising its debt capacity. When the Airline Group signed the contract in March 2001 debt levels had increased such that the cash flow ratios were in line with the "BBB" rating criteria, the lowest investment grade rating. The implications of NATS' financial structure under the PPP are examined in more detail in Part 3 of this report.
1.37 The Airline Group's proposed financing plan necessitated opening debt of £733 million. From the outset this resulted in tight financial ratios. In July 2001, when the deal was completed CSFB advised that these factors would make it unlikely that NATS could achieve an investment grade rating.
1.38 Nimbus had proposed a structure with an initial bank debt of £605 million rising to over £800 million, including a higher working capital facility of £100 million, on the basis of a much lower level of capital investment than the Airline Group. It also sought changes to contract terms which would have increased the risk of claims being brought against the Government.
1.39 The price paid by the Airline Group was towards the bottom of the range of the Department's pre-sale valuations. The Department commissioned two valuations. The first in March 1999 by CSFB was updated in July 2001 to take into account revised traffic and cost forecasts. This gave an Enterprise Value1 for NATS in the range £825-£965 million. In February 2001, the Department commissioned an independent valuation from PricewaterhouseCoopers which when updated in June 2001, gave an Enterprise Value of £794-£990 million. CSFB's final assessment of the full value of the whole business implied in the bids was £873 million for the Airline Group, and £851 million for Nimbus, therefore both were in the bottom half of the range of valuations for NATS.
1.40 Overall there was little to choose between the Nimbus and Airline Group bids, though the Government's view, based on an objective valuation of both bids was that there was sufficient to make the Airline Group the right choice. The choice of the Airline Group had other advantages. It had presented its bid as being on a "not for commercial return" basis, which meant that in the short to medium term at least, any profits would be ploughed back into the business, and no dividends paid. The Airline Group's bid had attracted support from sections of the public and NATS' employees, some of whom voiced a perception that profits were incompatible with safety. The Airline Group's bid was also formally supported by other airlines, in the form of the International Air Transport Association and other representative bodies.
1.41 There was also opposition from some NATS' employees towards control of the company being awarded to Nimbus, with some expressing fears for the erosion of their terms and conditions, and for the loss of jobs. Unknown to outside commentators, Nimbus' bid proposed to recruit more controllers and create fewer redundancies than either of the other two Stage 3 bidders. The union representing air traffic controllers and engineers, Prospect (at that time the Institution of Professionals, Managers and Specialists), said that if the PPP were to proceed, they would prefer the Airline Group to Nimbus as the strategic partner. Prospect considered that the bid from the Airline Group would lead to fewer redundancies of its members, recognition of the need for greater union involvement in decision making, and a stated commitment to improved partnership and participation in industrial relations.
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1 Enterprise Value is based on earnings of the business before interest, tax, depreciation and amortisation, and also taking the debts of the business into account