A lot has gone missing in the Masters mess

Closing down sale at Masters Home Improvement store in Knoxfield, Victoria. (Stuart McEvoy for The Australian)

Yesterday, as Lowe’s launched its legal action against Woolworths, a team of some 65 people from the Great American Group (GAG) began clearing stock from Masters stores.

Lowe’s wants to liquidate the company, which would potentially leave the landlords short and kill the present deal with a David Di Pilla-led consortium.

The whole scenario is a mess made worse by the fact that Woolies and Lowe’s could not come to an agreement before the $1.5 billion liquidation deal was reached.

Woolies is confident but the court decisions aren’t always easy to predict.

The fight has been on since January when the partnership was effectively terminated with Woolies valuing Lowe’s’ share at zero and Lowe’s valuing its share at, say, $500 million and, depending on how the case unfolds, we will eventually learn who had the correct figure.

The fight will potentially leave no-one unscathed, including the shareholders of both companies.

In the middle of it all there are 13 sites which have seemingly disappeared.

The original data room involved 97 sites, of which Di Pilla will get 81 and Woolies three, but that leaves 13 with no apparent home.

Woolworths isn’t saying too much but it is clear that it is vulnerable to attack because the ends haven’t been tied up.

Bunnings is taking 15 sites from Di Pilla, eight of which are freehold and the remaining seven are leasehold.

On change of control or liquidation, the owners have a claim against the guarantees.

That explains why Woolies isn’t talking up just what happens to the $725m coming from Di Pilla.

Lowe’s doesn’t really care who gets to move in on the sites which is why it calling for an outright liquidation.

Woolies would like have some say over who moves in because it wants to minimise the competition which explains why it was happy with Di Pilla’s terms.

The question is whether Woolies concern over competition issues meant it didn’t get the best price for its shops.

There are 6,500 employees who, if they all lose their jobs, could cost Woollies around $50m in redundancy payments.

It has offered them all jobs in Woolies and the more who decide to join, the cheaper the payout will be.

That said, most staff have only been there a short time and this will help to keep redundancy costs down.

But it’s the property that’s the biggest unknown.

By way of example, say Woollies has agreed to pay $2m a year in rent, now Di Pilla walks in and says I will pay you $1.5m and Woolies would be up for the difference meaning $500,000.

Rather than keeping this going, it would approach the landlords and perhaps say how about we settle for $4m upfront and cancel the lease.

Apart from the 13 properties which have disappeared, there are 21 leasehold properties which are subject to this sort of negotiation.

As the Lowe’s action hits the Federal Court again tomorrow for a directions hearing, the question is just where the proceeds in the $1.5bn is going.

There are three deals — the Metcash Home Timber and Hardware deal worth $165m, the GAG inventory liquidation worth $500m and the $725m from the David Di Pilla-led consortium for 81 sites.

Woolies itself is also paying $105m for three of the sites, which brings the total to $1.495bn.

Woolies said the net proceeds would be $500m, which, as the 65 per cent shareholder in the Hydrox holding company, would mean it collects $325m and, as the 35 per cent shareholder, Lowe’s would get $175m.

So what happens to the other $1bn?

Di Pilla will get 81 sites, 20 of which are purely developments, 40 are freehold and 21 leasehold.

The leasehold properties will be managed by Di Pilla with his new retail tenants (which include Chemist Warehouse, Spotlight and JB Hi-Fi) paying rent.

Woolies has guaranteed all the leases and, as part of the joint venture Lowe’s, has agreed to indemnify Lowe’s for any losses to its 35 per cent stake.

Meanwhile, the biggest stock liquidation in Australian retail history is happening.

Ironically, a couple of weeks ago Masters had a garage sale offering 50 per cent off.

Now GAG has started its sale at 10 to 30 per cent off and it will continue to sell what it can at whatever price.

It has underwritten the sale at 90 cents in the dollar, which was a coup for Woollies.

But that is about the only thing which is proceeding with any certainty right now.