Andrew Janes

The two-year battle for control of New Zealand's biggest retailer looks set to move to a new arena - the Supreme Court - after the Court of Appeal blocked Woolworths and Foodstuffs from making bids. The decision led to The Warehouse's share price plunging to a nine-year low of $3.01 before rebounding to close down 60 cents on $3.22.

Woolworths, of Australia, and Foodstuffs, owner of New Zealand's two largest supermarket chains, issued statements expressing disappointment and saying they were reviewing their options. They have 20 working days to decide whether to appeal to the Supreme Court. Stephen Tindall, The Warehouse founder whose interests control 52 per cent of the shares, was unavailable for comment.

The Commerce Commission, which blocked the two chains from bidding for The Warehouse last June and then had its ruling overturned by the High Court in November, hailed the decision as a victory for consumers. Despite The Warehouse having only three stores with grocery offerings, it could not be ruled out as a significant supermarket competitor, commission chairwoman Paula Rebstock said. "The commission considered the presence of an innovative third party, such as The Warehouse, had the potential to increase the level of competition in this important market."

Most analysts, fund managers and competition lawyers BusinessDay spoke to said they thought Woolworths and Foodstuffs would go to the Supreme Court. "I'd say there's an 80 per cent-plus chance of that happening," Tower portfolio manager Paul Robertshawe said. Buddle Findlay competition partner Tony Dellow said: "Given they have already spent a lot of money on this, the incremental cost of going to the Supreme Court is pretty low."

What chance the companies have in the Supreme Court will be hard to gauge till the Court of Appeal issues its judgment, probably early next week. "A lot is going to depend on how the Court of Appeal has framed its answer today," Chapman Tripp partner Andy Nicholls said. The two main questions would be about the likely performance of The Warehouse Extra stores (offering groceries) in the next few years and how speculative the commission could be in predicting whether the stores would challenge the existing supermarket duopoly. "The concern everybody will have is the extent to which the Court of Appeal has endorsed the commission taking quite a speculative approach when faced with a new entrant. I imagine the supermarkets will be looking hard at that, and that would be the question they would consider [testing] in the Supreme Court."

If they are unsuccessful, there are several other ownership scenarios for The Warehouse. Mr Tindall, who made a $5.75-a-share bid in partnership with Pacific Equity Partners in 2006, may have another go at privatisation. "Price-wise the timing would be better now than it was then," Forsyth Barr analyst Guy Hallwright said. "But raising debt would be a lot more difficult."

Deutsche Bank analyst Kristan Walker said Mr Tindall and PEP could well make an offer for the 20 percent held by the two supermarket players. "It could be quite an opportune time for Stephen Tindall to come out with a privatisation plan and literally offer something on the table and take the stock off their hands – that's an extra 20 percent that sits alongside his 50-odd percent, and then it's not so much of stretch to get to the compulsory acquirement level."

Market commentator Arthur Lim said funding such a move would not be an issue, with Mr Tindall's stakeholding and PEP among one of the most cashed-up private-equity funds around. Nothing was stopping Mr Tindall going ahead with another privatisation bid, but without knowing whether Foodstuffs or Woolworths would appeal, such a move would be premature.

Rival bidders may also emerge, with Australian conglomerate Wesfarmers seen as the most likely. However, after buying supermarket chain Coles last year, Wesfarmers was busy trying to turn that business around, ING senior analyst Craig Brown said. "I think you've got the two most logical bidders on the table right now."

The Warehouse may decide to scrap its grocery strategy, though it is unclear whether that would clear the way for a Woolworths or Foodstuffs bid. "One thing that hasn't changed in all this is that the key player is Stephen Tindall," Mr Brown said.

The Government wants to double the percentage of domestic freight moved by sea - but has given itself till 2040 to achieve its aim.  Transport Minister Annette King last night unveiled Sea Change, a draft strategy aimed at revitalising coastal shipping, which she called the poor cousin of the transport sector.

The amount of domestic freight was forecast to double during the next decade, driving the need for reorganisation, she said.  The roading network had a limited capacity to handle that.  About 15 per cent of domestic freight is transported by sea. Sea Change wants to double that to 30 per cent by 2040.

To help achieve this, the Government will set up a maritime liaison unit in the Transport Ministry.  It will promote awareness of coastal shipping and help domestic coastal shippers and ports apply for government financial assistance.

Ms King said that financial aid could involve grants to establish new shipping services. She already had a Budget bid in, to provide this type of funding for 2008-09.  Shippers or ports applying for grants would have to demonstrate the economic viability of their proposal at some point in the future.

The strategy will take effect against a backdrop of large international shipping lines moving to larger container ships, calling at fewer New Zealand ports.  "We've got to realise that when the hub-and-spoke strategy of international shippers takes even greater effect then we've got to move freight from the Timarus and the Greymouths and Napier and Gisborne and so on.  "We've got to make sure we're utilising those ports to the best of their ability and seeing how they can be integrated into our rail work and our road work.  "We're trying to get ahead of decisions that might be made to New Zealand by planning for the future and expanding our coastal shipping capacity."

Shipping Federation president Rod Grout welcomed the draft strategy, saying the 30 per cent target was the biggest boost to New Zealand coastal shipping that he could recall.  One of the things the federation had sought was modal neutrality between road, rail and coastal shipping. Increased funding for coastal shipping would help achieve that, he said.  Mr Grout, also chief executive of New Zealand's biggest domestic shipping company Pacifica, said as international shipping companies called at fewer ports they would have a choice of using road, rail or coastal shipping to move containers to the larger ports.  "If coastal shipping is competitive with road and rail then we'll get a look in," he said.  "If we're not, we won't."

Freightways' first-quarter profitability was flat as the express delivery company continued to be shackled by the sluggish economy. Managing director Dean Bracewell told shareholders at the annual meeting in Auckland yesterday that operating earnings for the three months to September 30 were up by 4 per cent. But higher interest rate costs meant net profit was flat at $7.7 million, he said.

Mr Bracewell declined to comment on mounting takeover speculation. Freightways, which shares the New Zealand express package market with NZ Post in a near-duopoly, has long been touted as a likely takeover target. Suggestions that Toll Holdings might launch a bid have been around for a couple of years. This month, the Australian Financial Review reported that as well as Toll, Qantas, FedEx and Deutsche Post's DHL were interested.

"I have no doubt that it's on at least a couple of companies' radar screens," First NZ Capital analyst Andrew Mortimer said. "I certainly wouldn't discount it but it's a question of timing. It's got an open register and it's vulnerable."

Mr Bracewell said he saw no short-term let-up in the challenging New Zealand conditions. "We said at the full-year we expected a flat environment and that's what we've got," he said. "It will come back; it always does. And when it does we'll be ready with good-quality capacity and we'll reap the benefits of it then, but I couldn't put a time frame on that."

At close the Freightways share price was down 15 cents at $3.80.

Growth in the business mail and information management businesses continued to outpace the core express business, Mr Bracewell said. Capital investment of $15 million would be spent during the 2008 year including the initial development of a recently acquired information management site in Wellington.

Freightways' largest shareholder is Fisher Funds, which has a 9.8 per cent stake. Fisher Funds chief investment officer Warren Couillault said Freightways was doing well relative to the conditions it was operating in. "It does feel to me that the underlying barometer of the economy, in moving freight around the country, has been weak for about a year and a half," he said. "The fact that they're holding their bottom line is good, given that they've got huge cost increases in labour, occupancy and energy. "The little nibbling acquisitions they are making in data and storage are good as well. That will give them a springboard in Australia and it's exactly what we want them to be doing."

Directors Sue Sheldon and Sir William Birch were re-elected to the board at the meeting. Directors' fees were increased from $225,000 to $336,000. This includes $52,000 to be available if a sixth director, likely to be an Australian, is added to the board.

Mainfreight has taken another step towards its goal of becoming a major global logistics player with the $76 million acquisition of United States freight forwarder Target Logistics.  The New Zealand freight forwarder and logistics company will pay $3.54 a share for Target, which is listed on the American Stock Exchange and incorporated in Delaware.

Mainfreight already has acceptances from Target's three major shareholders, who together hold 66.5 per cent of its stock, and under Delaware law is able to compulsorily acquire the rest of the company.  Managing director Don Braid said the remaining Target shareholders were able to challenge the acquisition in the courts, but he didn't think that was likely.

Mainfreight's offer is at a significant premium to Target's current share price which last closed at $2.59.  "We think we've paid a fair price for Target shareholders and a fair price for Mainfreight," Mr Braid said.

All going smoothly, the acquisition will be completed by November or December with Mainfreight intending to run Target as a stand-alone company retaining its brand and current management.  Target has 34 offices across the US, more than 3000 customers and about 350 staff.  It has an international network of agents in more than 70 countries and has a strong presence on China and Southeast Asia routes, with many of its US customers manufacturing in Asia.

Its revenue in the year to June 2008 is expected to exceed $255 million and earnings will be positive from day one for Mainfreight.

Forsyth Barr analyst Rob Mercer said the acquisition did not come as a surprise.  "They've bought exactly what they've said they've been targeting. It looks like it's a well-run business."

Mainfreight shares closed up 5 cents at $7.10.

Mainfreight is in acquisition negotiations with three United States freight-forwarding companies as it looks to continue its international expansion.

Managing director Don Braid said negotiations on value were under way with three mid-sized companies that have multiple US locations and branches in Asia and Europe. A fourth potential takeover target had yet to be visited by Mainfreight's senior management team, he said.

The transport and logistics company made the announcement as it reported another strong annual result - an after-tax profit of $36.4 million for the year to March 31, a 25 per cent increase on the previous year. A one-off gain of $19.2 million from the sale of its 24.5 per cent stake in Hirepool boosted the total net surplus to $55.6 million.

The directors approved a final dividend of 8 cents a share, bringing the total dividend for the year to 15c a share, compared with 12c the year before. The result was slightly ahead of analyst expectations and Mainfreight's share price closed up 15c at $7.25.

After-tax profit grew by $7.4 million, most of which came from Mainfreight's overseas operations, with Australia and the United States contributing $6.5 million and New Zealand $0.9 million.

Overseas operations accounted for more than half - 54 per cent - of the net surplus before abnormals.

Mr Braid said New Zealand trading conditions had been more difficult in the past six months, with decreasing domestic and export freight volumes. New Zealand domestic revenue of $270 million was unchanged from the year before, though earnings before interest and tax improved by 5 per cent. Mainfreight had to gain market share to hold its revenue in New Zealand, Mr Braid said. "I think we've performed pretty well in a tough market."

In the New Zealand international business, revenue was up by 3 per cent to $153.4 million. Mr Braid said Mainfreight was continuing to win market share from competitors in Australia and the US. In Australia, Mainfreight now had a good network in all the state capitals and was continuing to expand into the smaller regional centres, he said.

"While some of these branches are yet to be profitable, in Mainfreight fashion we see this as further opportunity for growth."

In the US, Mainfreight revenue grew by 25 per cent to $111 million and the company opened new branches in San Francisco and Boston. Margins in the US had improved because of Mainfreight's ability to load more direct containers from each branch, rather than via gateway branches, Mr Braid said.

First NZ Capital analyst Andrew Mortimer said some of Mainfreight's overseas growth was quite extraordinary. "They've obviously built some good businesses and have clearly done a good job," he said. "And it's lucky because the New Zealand market is in the doldrums."

Mr Braid said Mainfreight had continued to see overseas trading improvement during the first two months of this financial year. "In New Zealand the environment remains challenging in what is traditionally a quarter of low activity for us."

Though not issuing any guidance, Mr Braid said Mainfreight remained confident about its growth potential in the near term.

The Commerce Commission's attempt to claim three further scalps in the Carter Holt Harvey mislabelling of timber controversy has begun.

CHH and the former general manager of its wood products division, Maurice Reid, have already pleaded guilty to breaching the Fair Trading Act by mislabelling timber, used in the construction of thousands of homes. The company was fined $900,000, while Reid, now retired, was fined $20,000.

The commission is now prosecuting the former managers of three of CHH's sawmills, with the case starting yesterday in Auckland District Court before Judge Bouchier.

It alleges that Robert Boddington, Matthew Nant and Colin Richman - the former managers of CHH's Nelson, Kopu and Putaruru sawmills - were aware of what was going on but continued to mislabel the timber.

The case relates to timber produced by CHH between July 2000 and November 2003 and sold under the brand name Laserframe. The timber was marketed by CHH as being MGP10 - a premium grade that could be used in the construction of house frames and roof trusses - but was not actually up to that standard.

It is estimated that 20,000 houses were built with Laserframe during the period. According to CHH internal documents, seized by the commission, the forestry company took the view that to stop selling the timber in question as MGP10 would be financial suicide.  Houses using the non-MGP10 timber sold as MGP10 may suffer defects such as deflections in the roof and squeaky floors, the commission said.

In its opening, the commission's lawyers alleged that because of Nant's involvement in a team set up by CHH to investigate the introduction of a new grade to replace the faulty timber he would have been aware of the problems with meeting the MGP10 grade.

As mill managers, Boddington and Richman were kept up to date with the team's progress, so would also have been aware of the problems.  It is also alleged they were aware that an independent test carried out by the Forest Research Institute in 2001 had confirmed that the MGP10 timber produced by CHH was not up to standard.

Commerce Commission chairwoman Paula Rebstock has previously described the case as one of the most important and serious Fair Trading Act cases it has dealt with.  The commission will call 23 witnesses.

Flush with close to $100 million from the sale of some of its Australian assets, Mainfreight is down to a shortlist of half a dozen potential acquisition targets in the United States.

But the transport and logistics company is wary of getting into a bidding war with private equity firms, and says it is prepared to wait for the right deal.

Mainfreight is selling two of its Australian businesses - Pan Orient Project Logistics and its 75 per cent shareholding in freight forwarder LEP - to Agility Group for $96 million. 

Managing director Don Braid said the money had been earmarked for expansion and would not be returned to shareholders.  "We've got a shortlist of six companies in the US that we'll be seeing at the end of April."

First NZ Capital analyst Andrew Mortimer said that at a conservative estimate Mainfreight had $200 million to $250 million available for acquisitions.

Mainfreight already owns US freight forwarder CaroTrans International. It has been talking for several months about acquiring another US freight forwarder, but has warned that competition from private equity firms might push prices too high.

"We've always said it's about the right company at the right price," Mr Braid said.  "We won't be pushed into an acquisition."

Analysts said that getting a good price would be tough in the present environment.  "Offshore acquisitions remain likely. However, we believe management is treading carefully in this regard," said a research note from UBS.  "We would not be surprised if no such acquisitions happened in this calendar year."

Mr Mortimer said: "It just comes down to whether you can get them (acquisitions) at the right price. That could be problematic in the current environment.  "We have seen a lot of companies mentioning acquisitions but taking a lot longer to consummate because prices are too high."

Mr Braid said that as well as the US, Mainfreight was also looking at acquisition opportunities in Australia and South-East Asia.  While the recent divestments would create a gap in Mainfreight's Australian operations, they did not make an Australian acquisition any more likely.  "Our expansion is likely to be more global than just New Zealand and Australia."