The Secretary of State for Business, Innovation and Skills (Vince Cable)
The Government’s decision to cancel the £80 million loan for a new 15,000 tonne press that had been conditionally offered to Sheffield Forgemasters by the last Government was taken on the grounds of affordability. Sheffield Forgemasters is a great British company with a dedicated, highly skilled workforce and a strong senior management team. The Government’s decision is no reflection on the company’s staff, directors or this particular project.
It is a worthwhile project, but when the coalition Government came into office they discovered that the previous Administration had allocated too much money across Government. In total, the previous Government approved £34 billion of new spending commitments between 1 January 2010 and the general election. It was therefore necessary to seek additional savings of £6 billion in this financial year. This meant that Ministers across the whole of Government had to take a number of very difficult decisions—cancelling the loan for a new 15,000 tonne press that had been offered to Sheffield Forgemasters was one such decision. The cancellation of the loan has not led to redundancies. In fact, the company continues to prosper.
Although the question of equity dilution had no bearing on the decision not to proceed with the loan to Forgemasters, comments made by the Prime Minister and the Deputy Prime Minister have been queried and I therefore wish to explain the position.
When giving oral evidence to the Business, Innovation and Skills Select Committee on 20 July 2010, I explained that there is an inherent problem with a relatively small company taking on a very big project. If the company finances the project with a large amount of debt it is likely to become so highly geared that its long-term viability is put at risk. If it funds the project with third-party equity, existing shareholders have to dilute their shareholding. This is not a criticism of the company, its shareholders or the project; it is simply a statement of the problem and it is something that the chief executive of Sheffield Forgemasters, Graham Honeyman, raised in an interview with the Yorkshire Post on 17 June 2010 when he made the following points:
“Private equity would take the whole of the shareholding away from Forgemasters and put it in the hands of somebody else. That is, not just my shares (49%) or the other directors, 65% of the shop floor own the shares in the company. The amount of money to put in to fund the press would more or less have to absorb the whole of the shareholding”.
“The reason why we went to the Government is the interest rates were reasonable. Bank interest rates are very high therefore we would have to make huge profits every year in order just to pay off interest on the debt. This is why we needed support from the Government”.
It is this dilution that the Prime Minister and the Deputy Prime Minister were referring to when they spoke in the House. The chief executive of Sheffield Forgemasters has confirmed that he is prepared to dilute his shareholding in the company in order to facilitate the project. However, it has also been clear that the shareholders would seek a fair price for any equity sale, and at this time their view is that their returns from growing the business organically are likely to exceed those from undertaking the 15,000 tonne press project if the purchase of the press was financed by substantial equity dilution.
On 20 July, Sheffield Forgemasters issued a statement in which the company said:
“We are still keen to undertake the 15,000 tonne press development but feel that the company’s best interests will be served by suspending work on the project for the time being. The opportunities in global nuclear will continue to grow”.
“This pause will give the company, which has invested more than two years and significant funds to this project, time to resume a greater focus on growing our business into civil nuclear and other sectors. We will continue to pursue other development opportunities based around our 10,000 tonne and 4,000 tonne forging presses and our recently completed programme of machine shop improvements”.
“As our thinking develops we will of course take up the Government’s offer of further discussions. The company recognises the difficult financial position faced by the country and accepts the loan offer will not be reinstated”.
The Government understand this decision and the company’s desire to focus on other projects. We have made clear that we stand ready to work closely with the company as it pursues its ambitions and we are willing to look carefully at all proposals, as we would for any project, when the future availability of public funds becomes clearer after the completion of the spending review.