3. Administration of Cairngorm Mountain Ltd and establishment of new operating company (2018)
3.1 In September 2018, in response to concerns raised by their annual inspection of the funicular railway, CML took the decision to cease operations. The railway has remained out of operation since. Work is ongoing to return to operations as soon as possible. In addition, the planning authority rejected Natural Retreats' application to create an artificial ski slope, a key feature of their refreshed business plan. In October 2018, Natural Retreats requested a working capital loan from HIE. This was not provided as HIE felt Natural Retreats could not afford to service the debt maintenance costs and because no further security was offered. The HIE board agreed that administration looked very likely and that therefore a managed exit strategy should be pursued.
3.2 HIE had appointed legal [REDACTED], financial [REDACTED] and taxation [REDACTED] advisers to support them throughout this process. It was evident that HIE officers made clear efforts to engage constructively with CML's directors, initially to achieve a managed exit, and once this was not possible and the administrators were appointed, HIE focused on ensuring business continuity. HIE obtained a period of exclusivity to negotiate with the administrators during their process to seek an operator for the business. HIE put the administrator in funds to continue operating, covering staffing and other overhead costs – this is normal practice in such circumstances. This ensured that sufficient time was available to undertake the appropriate level of due diligence and prioritising continuing operations.
3.3 As part of the due diligence, an independent asset valuation was undertaken which supported the consideration payable (£462k) by HIE for the business and assets of CML in 2018. This was for:
- the assets and business of the company only and no liabilities were taken on by HIE;
- sums in relation to salaries and other operating costs for the period under which HIE
was an exclusive bidder.
While the consideration was higher than that received for CML in 2014 (£200k) it should be noted that the total paid in 2018 included putting the company administrator in funds to allow trade to continue while negotiations continued. The figures for 2018 and 2014 are therefore not directly comparable.
3.4 HIE officials state that they secured business continuity at a cost which was less than purchasing the business as a going concern. While it is difficult to specifically put a value on business continuity, the non-financial benefits are evident.
3.5 While it is clear that the operation of the new subsidiary will require additional spending, the extent of this will depend on the operating model and business plan going forwards.
Key issues - administration
Did HIE sufficiently leverage their status as preferred bidder in order to achieve the best price possible?
Response & mitigation
HIE's primary aim was to ensure that business continuity was maintained and wider impact was minimised.
The consideration payable was supported by an independent valuation.
HIE were supported throughout the process by advisers and appropriate resource was dedicated to the due diligence.
Did HIE make appropriate consideration of the broader financial impact of its actions as part of this process?
Response & mitigation
HIE engaged Scottish Government officials throughout this process including the sponsor team, finance and rural economy officials.
This is appropriate and in line with HIE's duties to obtain Scottish Government approval for activities which are "novel and contentious". This is in line with HIE's duties under its Framework Agreement with the Scottish Government and under the Scottish Public Finance Manual.
By taking the action it did, HIE has bought the time to be able to consider the longer term view for Cairngorm and the operating company and in addition secured access, albeit limited access due to the funicular breakdown, to the mountain.