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Godfrey Hirst argues for leave to appeal decision over wool scouring merger

Cavalier has said there is currently excess wool scouring capacity in New Zealand.

Fiona Rotherham
Tue, 12 Jul 2016

Australian-owned Godfrey Hirst has applied for leave to appeal a High Court decision last month which dismissed an earlier bid to block a merger of New Zealand's largest wool scouring operations.

The Commerce Commission in November approved a plan for Cavalier Wool Holdings (CWH) [NZX: CAV] to acquire New Zealand Wool Services International's wool scouring business and assets, saying the public benefits would outweigh the substantial loss of competition. The merger has been stayed pending the appeal by Godfrey Hirst, a rival of New Zealand-owned carpet-maker Cavalier Corp which is one of the three shareholders in CWH.

Cavalier has said there is currently excess wool scouring capacity in New Zealand and the merger proposal was about consolidating assets and realising efficiencies in order to keep wool processing in the country longer term. The idea is to avoid the off-shoring of scouring that has occurred in Australia.

In the High Court at Auckland today, Godfrey Hirst's lawyer John Dixon said it was seeking leave to argue its appeal before the Court of Appeal on three grounds including that the Commerce Commission incorrectly treated the benefits that go to foreign shareholders.

There's a wider public benefit in how the test set out in the legislation allows parties to gain authorisation for these types of mergers, Dixon said.

The commission relied on a test case from the early 1990s involving Telecom which found it shouldn't discount benefits achieved by foreign shareholders. There has been hardly any case law on the issue in the past 25 years and Godfrey Hirst is arguing that's the wrong interpretation.

The merged scouring business will be 55 percent owned by Cavalier, private equity firm Direct Capital and the Accident Compensation Corporation, with WSI parent Lempriere Australia taking a 45 percent stake. Lempreire, which is majority-owned by Chinese-based textile group Shandong Ru Yi, has an option to increase its stake to 72.5 percent by buying out ACC and Direct Capital.

Dixon said if the productivity gains accruing to foreign shareholders in the wool scouring merger were discounted, the numbers on net benefits wouldn't stack up.

The commission took more than a year before reaching its final decision, including taking the unusual step of publishing a second draft decision and conducting a further hearing of parties' views behind closed doors. The finely balanced decision ended up with a net benefit range of just $0.81 million to $23.42 million after assessing the net impact of the merger over the first five years. That differed to its second draft determination where the low end of the net benefit was said to be $4.51 million.

The commission found Cavalier will essentially have a monopoly on the supply of wool scouring services and the supply of wool grease and will be able to raise its prices when the merger is completed. But its analysis was that there were public benefits to New Zealand from the acquisition proceeding.

Dixon said another ground for leave to appeal was that the commission didn't consider evidence from smaller wool merchants that the merger could lead to price increases of up to 20 percent, and had instead indicated price increases would range only between 5 and 15 percent.

The third ground was that the commission didn't give enough weight to the likely future of WSI's Kaputone wool scouring plant in Christchurch.

David Goddard QC, representing Cavalier, said the commission had relied on established case law from the 1991 Telecom case in its treatment of foreign shareholders and there was no need to revisit the issue.

Even if the Court of Appeal accepted the law should be interpreted differently, it wouldn't change the outcome of the authorisation where qualitative issues were as important as the net benefit numbers, he said.

Goddard said Cavalier was incurring substantial monthly losses from the delayed merger, though the actual numbers cited were kept confidential in court. WSI also needed to make a decision with some urgency on investment that wouldn't go ahead if the merger happens.

It had already been a "long and slow process" achieving authorisation, without a further six-month delay for a second appeal, Goddard said.

He argued parties would in future think twice about seeking authorisation if the outcome was opponents could readily achieve leave for a second appeal at a significant cost to the applicants. If the court grants Godfrey Hirst leave to appeal, Goddard sought to have the case confined to just the issues that led to it being granted, rather a "general admission ticket" to argue all the merits of the decision again. That would cost more and delay when the case could be heard due to demand on the Court of Appeal's resources, he said.

If the leave is rejected, Godfrey Hirst could still seek an appeal directly from the Court of Appeal.

Justice Murray Gilbert reserved his decision.

(BusinessDesk)

Fiona Rotherham
Tue, 12 Jul 2016
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Godfrey Hirst argues for leave to appeal decision over wool scouring merger
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