Hot Topic NBR Focus: GMO
Hot Topic NBR Focus: GMO
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Australian-owned Godfrey Hirst questions foreign shareholder

Godfrey Hirst is appealing the Commerce Commission's decision last November.

Sophie Boot
Thu, 15 Sep 2016

Australian-owned carpet maker Godfrey Hirst is questioning the benefit of foreign shareholders to New Zealand in its bid to prevent the creation of a wool scouring monopoly.

Godfrey Hirst is appealing the Commerce Commission's decision last November to allow Cavalier Wool Holdings to acquire New Zealand Wool Service International's wool scouring business and assets, allowing a monopoly on the supply of wool scouring services and the supply of wool grease on the trade-off that there was a broader public benefit in fending off competition from cheaper foreign rivals.

The Court of Appeal limited the carpet maker's argument to whether the High Court erred in agreeing with the commission's treatment of productivity gains which would flow to foreign shareholders from the merger. The commission relied on the appeal court's decision from 1991 in a case between Telecom and the Commerce Commission, referred to as AMPS-A, where the court found that gains to foreign shareholders should not be discounted in deciding whether the merger should go ahead.

"We're not saying it's a detriment, we're just saying it's not a benefit," Godfrey Hirst's lawyer John Dixon said today. The commission had quantified the benefits of the merger as between $1 million and $15 million, but that valuation hadn't been properly assessed and it may be unquantifiable, he said.

"If you adopt our approach, you'd exclude these benefits and basically what that means is nearly half of the benefits the commission ascribes to this transaction would be excluded," Dixon said. "Instead of having a range of likely outcomes that is all positive, if you take away 45 percent of those benefits as we say you should, then the range of quantified benefits moves substantially into the red. The likely outcome goes to between minus $6.5 million to positive $14 million, so you straddle zero and there's a material likelihood of outcomes which are detrimental to the public of New Zealand."

The lawyer for Cavalier and New Zealand Wool, David Goddard QC, said the High Court had been right to rely on AMPS-A because profit outflows to foreign shareholders shouldn't be regarded as a drain on New Zealand.

"We welcome foreign capital in New Zealand, we've depended on it for the whole of our history and will no doubt continue to do so," Goddard said. "We accept when foreign capital comes into New Zealand, you have to pay for it - it's capital provided to us in exchange for the returns on and of that capital over time. It's wrong to treat dividends going offshore as a detriment to New Zealand, it's wrong to treat a buyback of shares as a loss, we don't treat it as somehow offsetting the reality of those productivity gains."

Matthew Dudding QC, the lawyer for the Commerce Commission, said calculating feedback effects was "not simply a mathematical exercise", and when there was foreign ownership the commission didn't necessarily have to discount productivity gains.

"We do not want to discount or ignore real productive efficiency gains where they have been found, we think these are good things for the New Zealand economy," Dudding said. "Just because there's foreign shareholder doesn't necessarily mean you should ignore or discount those gains you've found, because they are inherently good unless shown to the contrary and there's no evidence to the contrary."

Dudding said this wasn't a merger-specific point, but was a broader question about whether New Zealand wanted to attract foreign capital to its economy.

"If you want to start treating foreign investors differently, you'll have some negative impact on that capital," Dudding said. "The commission said expressly in their decision they aren't the same, but we don't want to discriminate against foreign investors because that might have an impact on quite a large inflow of capital."

Goddard asked the judges for expediency in making their decision, as the merger has been stayed pending the appeal. The one-day hearing is continuing.


Sophie Boot
Thu, 15 Sep 2016
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Australian-owned Godfrey Hirst questions foreign shareholder