Gloves off after Masters disaster

The full extent of the Masters debacle was underlined yesterday when Lowe’s took legal action against Woolworths.

US Federal Reserve chairwoman Janet Yellen. Illustration: Sturt Krygsman.

Lowe’s chief Robert Niblock was almost as effusive as Michael Luscombe when the two signed the deal to create Masters back in 2009, but yesterday the full extent of the debacle was underlined when the North Carolinian took legal action against Woolworths.

Folks from North Carolina are called Tar Heels for a reason no one is quite sure of, but in the Civil War they were said to stick to their ranks like they had tar on their heels.

Court and commercial action are common bedfellows. So that it would end like this is not a surprise, but just how it ends was unclear yesterday.

This is partly because Woolworths was yet to get its hands on the court documents, so it was not sure what Niblock was trying to achieve, other than agitate for a better deal.

The Tar Heel was clearly unimpressed with the $1.5 billion ­liquidation unveiled last week and the $180 million Woolies boss Brad Banducci had earmarked for 34 per cent joint venture holder Lowe’s.

The liquidation had three parts, the $165m sale to Metcash, the $500m liquidation by Great American Group and the $750m sale of property to a consortium led by banker David Di Pilla.

Lowe’s wants an independent party to run its eye over all three deals and, in any case, wants more cash than was on offer from Woollies.

Banducci made a courtesy dash to North Carolina two weeks ago to put the details of the deal to Niblock in the hope he would have signed off on the deal.

Niblock declined.

He has had Gilbert & Tobin and Jones Day on the job since the start of the year, along with his US team, and yesterday’s move was to shift the battle into new premises.

Relations between the two sides had long since fallen apart, and as embarrassing as a failed hardware deal was to supermarket giant Woolies it was a catastrophe for Lowe’s, the No 2 hardware store in the US behind the almighty Home Depot.

Niblock was already under pressure in the US for venturing offshore when his local business wasn’t travelling that well, and in January, when he wrote down the value of the business, he left a residual of around $500m on his books.

At the very least he would like to get that much and more.

Woolies would like to think this is just an aggrieved partner wanting a bigger settlement.

Di Pilla thinks his deal is safe because he has a call option on Woolies’ 65 per cent stake in the Masters parent company, so no matter what happens he gets his share.

That depends on whether the court finds the deal fair to all shareholders — including Lowe’s.

The action is now a matter for the lawyers and the key objective of the deal for Woolies is to free executives to concentrate on the main game, which is to run the supermarkets better.

But it is, at the very least, a nuisance.

Rowsthorn strategy

Mark Rowsthorn has for the moment outmanoeuvred one of his rivals, Richard Price at Havenfresh, by putting the company into administration and thus taking the matter out of shareholders’ hands.

The plan from here is for Rows­thorn and $60m debt holders SC Lowy to take a deed of company arrangement to McGrath Nicol and do what they were planning to do in the first place.

Price’s game is to get back the heavy haulage business he sold to the company at a cheap price and that explains why he wanted to roll the board.

He can of course lodge a bid for the business, because while Lowy is the major creditor, McGrath Nicol has a duty to maximise the exit price.

Trouble is Price has talked up a storm without every really lodging an alternative proposal.

The original game plan by Rowsthorn was to basically repeat the Toll magic and expand via acquisition and clever management of the roll-up.

The mining collapse and poor acquisitions intervened, and shareholders including Rows­thorn did their dough.

As always, he was trying to maximise returns in the interests of all shareholders, but by the end their patience had worn thin and he was the only one prepared to underwrite a $26m equity raising.

This was necessary to deal debt holder Lowy into the action with a 30 per cent stake, having bought out the banks in the shape of ANZ, Westpac and HSBC at 60c in the dollar.

The endgame of the company deed would be to effectively give Rowsthorn a lion’s share of the company and Lowy with 30 per cent. This is what Price wanted to stop, but so far, at least, without putting up his hand with an alternative strategy.

At the end of the day, when debt meets equity, debt walks away with the prize and shareholders get diluted, which is what is happening.

The assets have a fire sale value of around $140m with $4m equity and $100m of debt.

But all going to plan Rowsthorn can pick up the pieces and start building afresh after some adjustments, like selling the ­Cootes transport business.

Slow going

The ASX 200 index has fallen 2.9 per cent so far this month, which is fair representation of what corporate Australia dished up in terms of full-year profits.

The prevailing theme was slow revenue growth, and by now the “costs out” program is also starting to slow, so profits fell 8.6 per cent.

The good news is at least margins are starting to edge a little higher, which shows business is running well — it’s just got no fire power.

If further monetary stimulus was wanted then the Jackson Hole retreat at which the top US officials gather each year also proved a disappointment, because the Fed heads made clear negative rates were not their favourite tool.

US Fed chief Janet Yellen didn’t give any clue about future rate action, only that she would like some help.

“Fiscal policies and structural reform can play an important role in strengthening the US economy,” she rather coyly noted.

The US Fed is not a fan of the policy of negative interest rates, where banks pay the central banks for the honour of leaving their cash with it.

The concept is based on the hope that rather than leaving it on deposit the banks will lend it to someone. Which is what the banks would rather do, but there are not a lot of people demanding bank funds these days.

The US has short-term rates at 25 basis points and some in the market think it will increase rates to 0.5 per cent some time before the year is out, which would be at least a bullish sign.

It would show the Fed thinks the economy is gathering steam.

But at best just one more rate hike is expected this year, if at all, which shows the economy is only just gathering steam.

It would help if Washington could provide some stimulus, just as it would help if Canberra did likewise. But right now neither is likely.

The US is obviously frozen for the presidential and congressional elections and in Australia the Turnbull government is more focused on cutting the deficit.

All of which leaves investors with nowhere to run.