Nail guns at 10 paces as Lowe’s and Woolworths face off

It’s obvious that what Lowe’s wants is a far cry from what Woolworths thinks it should get.

Woolworths had recognised the potential that it would have to pay Lowe’s something to obtain its assent. Picture: by Richard Gosling.

In February, when providing an update on its planned exit from the Masters home improvement business, Woolworths (WOW) valued the option that its joint venture partner, Lowe’s of the US, held to “put” its 33 per cent interest to Woolworths at “$nil.” It’s been obvious for some time that Lowe’s had a different view of that option’s value.

While the joint venture agreement between the two shareholders, in the Hydrox Holdings joint venture that contained the home improvement, had a process for establishing the value of the option (if they could agree a value they each appointed an independent expert and, if there were still no agreement, a third to come up a price within the initial experts’ range) the months ticked by and there was no deal.

When Woolworths announced the sale of the Home Tiber & Hardware business to Metcash for $165 million, a $500 million underwriting of a liquidation of Masters’ inventory and a sale of the Master’s property portfolio to a consortium of private investors for $750 million, the absence of Lowe’s support for the Masters elements of the process was very apparent.

Lowe’s had approved the Home Timber & Hardware sale but the sale of the Masters property portfolio was subject to its consent. The consortium acquiring the property portfolio has agreed to acquire 100 per cent of Hydrox and Woolworths has granted it an exclusive call option over its two-thirds interest.

Woolworths also said it had exercised its right to terminate the joint venture agreement with Lowe’s and the associated option contracts “as a result of a dispute about the process to value Lowe’s shareholding under the option mechanism in the joint venture agreement.”

Today Lowe’s took court action, seeking an order to appoint an independent liquidator to oversee the winding up the Masters business. It is claiming bad faith and oppression by Woolworths in its attempt to terminate the joint venture. The property deal is where the bulk of the value of the Masters business lies.

When it announced the series of deals that would end the disastrous six-year failed attempt to establish the joint venture Woolworths said the estimated gross proceeds from the sales were about $1.5 billion, with estimated net proceeds of about $500 million after the wind-down costs and “prior to any shareholder payments.”

In other words, it at least recognised the potential that it would have to pay Lowe’s something to obtain its assent to the Masters deals. It is, however, obvious from Lowe’s actions today — and the failure of the companies to reach an agreement over the past seven months — that what it wants is a far cry from what Woolworths thinks it should get.

Woolworths, of course, separate to the $600 million or so of operating losses it has incurred over the years, wrote down the value of its interest in the home improvement business and provided for exit costs within the interim results it announced back in February. The impact was $1.9 billion after tax. That may have shaped its view of the value of equity in Hydrox.

Lowe’s may feel, with good reason, that it has some leverage. It knows Woolworths wants to put the Masters’ embarrassment and losses behind it and that, having announced its exit plan, it will want to execute it as quickly and smoothly as possible, which means it requires Lowe’s consent.

Lowe’s has written down its own interest in Hydrox by $US530 million, which would seem to imply it believes there may still be several hundred million dollars of value attributable to its interest.

Woolworths’ reference to “shareholder payments” last week suggests it was prepared to accept that it might have to pay Lowe’s something to get its consent for the property-related deals. It is an obvious conclusion after today’s action by Lowe’s, however, that what Woolworths is willing to offer and Lowe’s is willing to accept remain far apart.