Woolies set Masters D-Day to put Lowe’s under the pump

For Woolworths, the Masters D-Day was Wednesday, August 24 — no matter what its US partner Lowe’s did.

A ruling today will decide whether the Lowe’s-Woolies case goes to arbitration. Picture: Stuart McEvoy

For Woolworths, the Masters D-Day was Wednesday, August 24 — no matter what its US partner Lowe’s did.

Documents released by the Federal Court reveal Woolworths and its bevy of high-priced advisers, led by Citi’s head of investment banking Aidan Allen, were determined to announce the end of the disastrous hardware venture on that day.

The documents, released ahead of a ruling today that will determine whether a bruising stoush between the former Masters partners stays in the public arena of the Federal Court or is sent back to private mediation, also detail the high-pressure tactics Woolworths used to try to get Lowe’s to see things its way.

They show that Woolworths’ insolvency adviser Mark Korda, whose firm KordaMentha was paid $600,000 for its work, mulled putting Lowe’s in a ­position where it had to sue to preserve its rights — and accept unlimited liability for any damage to Woolworths if it lost.

GRAPHIC: The game plan

And they reveal Woolworths’ board, led by chairman Gordon Cairns, authorised letters of comfort protecting the directors of joint venture Hydrox Holdings should it become insolvent, a month before Mr Korda told Mr Allen and Woolworths’ chief legal officer Australia’s harsh insolvency regime could result in Hydrox directors going to jail.

Lowe’s has told the court that while Woolworths representatives on the Hydrox board received the letters, its nominees never did. It’s one of Lowe’s many grievances against the way it has been treated by Woolworths in a dispute that has been rumbling since before Christmas, when the Australian group first tried to get out of the Masters debacle.

Court documents show Woolworths offered Lowe’s the chance to buy its two-thirds of Hydrox for $580 million and proposed selling off the better-performing part of the business, Home Timber and Hardware, for $255m.

Lowe’s rejected the plan.

By early March this year, the former friends were at war over what the business was worth. The Australian understands Lowe’s expert, Lonergan Edwards & Associates, said it was worth about $650m but Woolworths’ expert, Grant Samuel, said it was worth nothing because it would not be a going concern.

And by the middle of the month, Lowe’s believed it was the victim of a Woolworths stitch-up that had been under way “from at least as early as September, and possibly earlier” to reduce the value of Hydrox. In a March 15 letter, filed with the court, Lowe’s Australian lawyers, Jones Day partners Chris Ahern and John Emmerig, told Woolworths’ lawyers at King & Wood Mallesons (KWM) that Lowe’s was “understandably perplexed as to how your client could report to the market … in September 2015 that the value of Hydrox was in excess of $2.8 billion, and provide assurances to ASIC to the same effect in October 2015, but now seek to ­assert the view it has on Hydrox’s value”.

The Masters saga was item six on the agenda when the Woolworths board met in the office behind its Dan Murphy’s liquor store in northern Melbourne suburb Alphington at 7.30am on Friday, July 22.

Minutes of the meeting have been heavily redacted but they show Mr Allen, who was running a complex process to sell Masters’ assets, was in attendance.

The minutes reveal Richard Dammery, Woolworths’ chief legal officer who represented the retailer on the Masters board, took Woolies’ directors through KWM’s legal advice regarding the solvency of Hydrox and recommended they approve letters of comfort “so as to give the Hydrox directors additional comfort regarding Hydrox’s solvency”. The resolution passed.

By August 10, Citi’s “Project Miami” — the sale of Masters’ assets — was “well progressed”, with a surplus of $500m in sight, according to an email Mr Korda sent to Mr Dammery, Mr Allen and others and tendered to the court.

There was one big problem: the unanimous consent of the Hydrox board was needed to sell assets worth more than $50m, and unanimity was in short supply.

“The Hydrox directors need to be made aware that Woolworths has provided funding of $100m to date on an undocumented facility of $214m,” Korda wrote.

“Woolworths as a debt provider is not prepared … to provide any further funding, nor are the shareholders prepared to provide any further funding.

“Accordingly without asset sales the company is likely to become insolvent.

“Australia has one of the toughest trading while insolvent laws in the world. In summary, if directors are found trading while insolvent it is a criminal offence and they could go to jail.”

He said if there was no agreement an alternative was to put Hydrox into administration and press on with the planned asset sale and wind-down of the Masters stores.

“Very helpful,” Mr Allen responded, adding that Woolworths could announce the sales “subject to shareholder approval” to put additional pressure on Lowe’s.

Mr Korda came back with “just a thought”. “Maybe think about a legal process whereby you give them, say, five days that you are going to sign the sale contracts and invite the option to take legal action against you during those five days,” he said.

If Lowe’s launched legal action it would have to give the court “unlimited undertakings as to damages which the Americans might think twice about”.

The timetable was starting to lock in, the documents show. A “game plan calendar” developed by the team foreshadowed ­announcing the shutdown on ­August 21, the day before Woolworths’ board was to meet “re earnings results”.

And by Monday August 22, the “Miami steps plan” foreshadowed an announcement on Wednesday, whether or not Lowe’s came to the party.

Woolworths duly announced a $1.5bn deal selling Home Timber & Hardware to Metcash, property to a consortium led by investment banker David Di Pilla and stock to run-out specialists Great American Group. It took an outraged Lowe’s only until the next Monday to take the stoush to the Federal Court.

Woolworths has not yet laid out its defence — and won’t ever have to if it succeeds in having the case sent back to arbitration today.