Dominion Post

Recycler Metal Man is making hay out of old car parts.

The Auckland-based company, which compresses and re-sells scrap metal, has 64 staff throughout New Zealand and an annual turnover of about $40 million.

Metal Man picked up several prizes at the recent Westpac Manukau Business Excellence Awards, winning the business of the year supreme award, and awards for excellence in manufacturing and exporting.

General manager Clark Proctor said the company's scrap metal came from a range of suppliers including boat builders, sheet-metal workers and automotive repair garages.

Metal Man exports about 50 per cent of its recycled metal, mainly to countries throughout Asia but also to Europe. The "top-grade furnace-ready" metal is used to make a variety of products, such as pots and pans, engine components and aluminium plates for boats.

Mr Proctor said the boom in scrap metal prices this year - they have risen by about 140 per cent - was "unbelievable", but not the windfall some might think. "I'm actually happy when prices are low. Because it doesn't promote thieving [of scrap metal], and removes those people from the fringes of the industry who are bad practitioners and rear their heads when prices are high."

Metal Man operates out of Auckland, Hamilton and Christchurch.

The longstanding Arbuckles brand is about to fade into oblivion as the manchester chain's new owner, Jan Cameron, liquidates stock in preparation to close the stores.

Ms Cameron, the former Kathmandu owner, is expected to use the sites to launch a new chain of homeware stores called Dogs Breakfast Trading Company, which she has already set up in Australia.

Ms Cameron, who has a wealth of $320 million according to the 2008 National Business Review Rich List, bought Arbuckles two weeks ago for $4 million from Postie Plus Group. She took over 13 stores throughout New Zealand, bought all the stock and re-employed most of the staff. Those stores were now advertising closing down liquidation sales.

Arbuckles was founded 35 years ago by John Arbuckle, who started the chain out of a van in Christchurch. He and his wife Vicki sold it to Postie Plus in 2003 for $9.5 million.

Ms Cameron could not be reached directly, but a spokeswoman at Arbuckles' head office in Christchurch said she had told staff she did not want to comment.

Dogs Breakfast Trading Company sells furniture, homeware, crockery and premium pet food, according to the store's Australian website.

Ms Cameron owns a chain of five homeware stores in New Zealand, called Nood. It was not known if she would use some of the former Arbuckles stores to expand Nood.

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.

Retail landlords must focus less on the bottom line and more on their tenants' needs or risk being lumbered with a portfolio of empty stores, say leading retailers.

High interest rates, a sluggish housing market, unprecedented fuel costs and inflated food prices have hit consumers hard, leaving all "but a lucky few" retailers juggling high rents and low sales. But with the gloom showing no sign of lifting soon, pressure is mounting on landlords to adapt to market conditions and work with retailers to see out the tough times.

Speaking at the Property Council's annual retail conference in Auckland, Stephen Alach, the general manager of surf retailer Amazon, said too few landlords appreciated how hard retailers were being hit by a downturn that extended from before Christmas. "All bar a few [landlords] don't look at anything except the dollars. They won't last if they continue with this ducking and diving attitude to tenants," he said. "Rent demands stay the same while some retailers are dealing with the reality of sales being up to 60 per cent down [on last year]. If the landlords don't react soon they are going to lose a lot of tenants."

Though retail giants like The Warehouse Group and Briscoe Group could survive the harsh times, independent retailers are more likely to "take their losses and walk away" rather than risk parting with more and more cash, Mr Alach says.

"It will be the landlords who feel the squeeze when tenants pull the plug and walk away. There needs to be a better understanding if we are going to get through this."

Landlords needed to spend more and think outside the box to draw consumers away from their comfy couches and plasma screens into the shopping environment, he said. This meant generating new store concepts with tenants, being more realistic about rental returns, and looking 10 years ahead instead of just one or two years.

"When you're caught in a wave, you can't breathe - you feel like you're choking. That's how it is for retailers at the moment, and that's how it will be for landlords if they don't react."

According to Statistics New Zealand, 15 of the 24 retail sectors had lower sales in the March quarter than in the last quarter of 2007. Those who are highly reliant on discretionary spending had a particularly tough year. Appliance stores experienced a 15 per cent fall in sales, furniture and flooring took an 11 per cent hit, and clothing lost 6 per cent.

New Zealand Council of Shopping Centres president Evan Harris said landlords needed to take a more "constructive" approach and "realise some of the pain" that retailers were suffering. However, John Bougen, director of national retail property developer Prime Retail, said the answer lay in fostering new tenants. "There will be demands for rent reductions. It's a call we will all be forced to consider over the next few months. The question is, `How long will it last?' Longer than a bank guarantee," he said. "[Landlords] need to consider fostering new tenants. They may not be the tenants you want in the good times. In the 1990s [recession], we had them on short-term leases so [that when things improved] they could be moved with dignity."

The recent meeting between Finance Minister Michael Cullen and Australian Treasurer Wayne Swann raised the subject of mutual recognition for imputation and franking credits, again.

For some perverse reason this topic has been raised several times by New Zealand ministers and officials based on the quaint and frankly naive belief that the Australians are going to give New Zealand investors and companies an even break.

Give me a break There is more chance of an Aboriginal becoming Australian Prime Minister than there is of the Australian Government agreeing to mutual recognition. The fact is that mutual recognition would cost the Australian Tax Office billions in lost tax revenue – money it would rather spend on things like schools and health that would win votes.

How this works is beyond the scope of this column, but the brutal facts are that mutual recognition has far more going for it for New Zealand than it does for Australia, and in turn that means the idea getting the Australians to agree to it is a pipe dream.

A few weeks back I noted a recent paper by Casey Plunket from Bell Gully discussing potential reform to the imputation credit regime in New Zealand. Things have moved pretty fast since early June. In the past few weeks the Institute of Finance Professionals New Zealand has held forums in Auckland and Wellington to discuss a proposal to allow streaming of imputation credits generated by Australian companies to be given to New Zealand investors.

Separately, NZX has also come out with a proposal to adjust the imputation credit regime to make it more attractive for Australian companies to dual-list in New Zealand, via a tax credit. There is also a third proposal doing the rounds.

All this activity is happening because of a coming review of the imputation credit regime being conducted by the Treasury. From a purely domestic standpoint there is nothing wrong with the imputation credit regime; it is very efficient and ensures that New Zealand shareholders do not suffer the problem of double taxation on dividends paid by New Zealand firms. This would be fine if New Zealand were a "walled garden" and there were no foreign investment or New Zealand companies investing overseas. But New Zealand isn't a walled garden and cannot afford the luxury of being one.

AUSSIE INCENTIVES
As a country we are absolutely dependent on foreign investment to run our economy. The problem New Zealand faces is that there is a big incentive for Australian companies to make full takeovers of New Zealand companies and cut local shareholders out of the picture.

The strategy is for any Australian acquirer to load up on debt to the maximum amount allowed under the thin capitalisation rules and drive down the taxable profit of its New Zealand subsidiary to the lowest level possible. This maximises the profit earned in Australia (and the amount of franking credits to be paid to Australian investors) and minimises the imputation credits earned/tax paid in New Zealand.

If you look at the example of the ANZ Bank, which has many New Zealand shareholders, the dividend paid to an Australian tax resident is much higher than that received by a New Zealand tax resident because of the impost of double taxation.

The idea of change is to allow New Zealand investors access to the imputation credits generated from tax paid by ANZ in New Zealand. The NZX proposal is a variation on this idea and proposes a tax credit regime to offset some of the double tax hit for New Zealand shareholders of Australian firms.

Either proposal aims to achieve the same goal – a reduction in the grab for New Zealand companies by Australian-listed companies because the tax outcomes are so favourable to them. The hope is that imputation credit streaming or a tax credit will encourage Aussie firms to set up proper New Zealand listings and provide some much-needed depth to our capital markets. This is one idea among many being touted as solutions to the lack of growth in the New Zealand market.

Despite all the work on improving regulation, and efforts of NZX and the strong economy, the sharemarket is now smaller in relative terms than it was five years ago. As we move closer to an election the "hollowing out" of the sharemarket is being set as an election issue.

Whether it becomes one is hard to say, but with the advent of KiwiSaver and the PIE regime there is more focus on investment issues than previously. Fact is that what has been driving a lot of investment decisions both locally and in Australia has been New Zealand tax policy.

This is the big elephant in the room no one is really talking about. New Zealand's tax policy in respect of investment and wealth creation is still very flawed. We have seen some signs of improvement with changes to the rules for controlled foreign companies and the introduction of the PIE regime, but these are only first steps in what has to be a major overhaul of tax policy in this area.

SNATCHING DEFEAT
Improving the operation of the imputation credit regime as far as Australian companies goes is a step in the right direction, but it still feels like snatching defeat from the jaws of victory. Why? Because solving the issue of double taxation for one country still leaves many others where it is a problem.

What of New Zealand companies that earn income in Europe or North America? Much bigger markets than Australia but the impost of double tax on these dividends and income is not being addressed. The usual complaint of impact on tax revenue is given as a reason for not making changes to taxes on investments – but that is taking a short-term view when longer-term strategic decisions should be made.

Allowing streaming of imputation credits or having a tax credit seem like only half answers to a bigger problem. If that is all we want then that is all we are going to get. And is that really enough?

* Bruce McKay is an Auckland investment banker.

Infratil says it has no plans to sell its minority stake in Wellington bus operator Mana Coach, even though the High Court has ruled out a planned merger with its Wellington bus business.

Infratil subsidiary New Zealand Bus runs the scheduled bus services in Wellington and the Hutt Valley. Mana Coach operates mainly north of Johnsonville and has limited runs into Wellington. Infratil acquired its 26 per cent holding in Mana Coach through the purchase of Stagecoach New Zealand in 2000.

New Zealand Bus was fined $500,000 and costs of about $600,000 by the High Court in 2006 after it tried to buy the rest of Mana Coach without Commerce Commission approval. The Mana Coach vendors at the time, Kerry and Ian Waddell, were found guilty of being accessories to the transaction, but not fined. Their conviction was subsequently overturned on appeal.

The Waddell family sold its 74 per cent stake in Mana Coach to merchant bank Bancorp, which in turn sold it to British transport entrepreneur Brian Souter last December.

Infratil executive Paul Ridley-Smith said yesterday that he expected the ownership structure of Mana Coach to continue in its current form.

Mr Souter was an experienced bus operator as a founder and major shareholder of Stagecoach, he said.

Last week the Court of Appeal turned down an appeal by the Commerce Commission against the High Court's decision not to convict Infratil for its role in the transaction. But the judgment upheld the $1.1 million fines and costs for New Zealand Bus, which were paid in 2006.

A restraint-of-trade clause in the contracts of shop assistants at Masterton Pak 'N Save has employment lawyers baffled and union delegates outraged.  The three-month clause, which is most often used by employers to protect trade secrets, stops employees working for rival stores after they leave the supermarket.

The Dominion Post was provided with a copy of a contract for a Masterton Pak 'N Save shop assistant which says the person cannot work for a rival or similar store within a 50-kilometre radius for three months after resigning.

Employment lawyer Peter Cullen said the clause was far-reaching and it would be hard to prove it was justified in the case of shop assistants.  "I've never heard of a check-out operator being subject to a restraint of trade."  It potentially stopped former staff working at vegetable stores, bottle shops and similar outlets.

But Masterton Pak 'N Save franchise owner Paul de Lara-Bell stood by the contract. "You can put whatever you want in a contract. Whether you can uphold it in a court of law, and whether people agree to it, are two different things."  He said the clause was mainly aimed at senior staff, but the supermarket would not rule out using it on others.

National Distribution Union secretary Laila Harre said the clause was completely unreasonable and illegal.  "People don't know what their rights are. They are fearful of breaching the contract and the clause keeps them in a job they're not happy with."  She said supermarket workers aged 15 and under usually earned about $6 an hour. Youth workers, aged 16 and 17, were paid $9 an hour, while those over 18 years earned the minimum wage of $11.25 an hour.

Susan Hornsby-Geluk, a partner with law firm Kensington Swan, said the courts scrutinised such clauses heavily, with the onus on employers to prove former staff had specialist knowledge.  "You'd be stretching it to say a packer of groceries has either client relationships or special knowledge that create a risk for the employer."

News of the clause has prompted Foodstuffs, which owns Pak 'N Save, to step in. Wellington region group manager Robert Kent said the clause was specific to the Masterton site only. The company did not believe it was enforceable.  "We need to take the steps to remove it from that particular site's employment agreement."

In March last year Wellington barista Victor Hsieh was stopped by the Court of Appeal from competing near any of Fuel Espresso's coffee outlets after he took the lease of a coffee cart, Beangrinder, a week after leaving Fuel Espresso.  He had a restraint-of-trade clause that stopped him making coffee within 100 metres of any Wellington Fuel outlet for three months after leaving.  But Ms Hornsby-Geluk said a barista was skilled and had stronger client relationships.

A growing number of New Zealand's chief executives are not fully achieving their financial targets but are still getting most of their performance pay, according to an executive recruitment company.

The 2007 survey by Sheffield of 501 chief executives, managing directors and general managers found the proportion not fully achieving targets rose from 28 per cent in 2006 to 43 per cent in 2007.

The proportion of chief executives missing all financial targets fell from 21 per cent to 10 per cent. Nevertheless, those who missed targets were still paid three-quarters of their targeted performance pay, according to the study. Those chief executives meeting all their financial targets fell from 51 per cent to 47 per cent.

Sheffield reward manager Jarrod Moyle said the results were in line with international trends, but raised concerns that the performance system was not working well.

Mr Moyle said it should also be taken into account that the target results were derived from reports from chief executives and from not their boards.

Business New Zealand chief executive Phil O'Reilly said that as targets would have been set well before the economy started to slow last year, the financial target data was fully expected. Mr Moyle said New Zealand was moving further towards international performance pay norms. In 2007, 65 per cent of chief executives were offered payments based on achieving financial targets, up from 56 per cent in 2006.

"While it may not be the panacea, if more companies had a stronger emphasis on linking payments to performance, it could contribute to raising New Zealand's productivity," he said.

Only 18 per cent of New Zealand chief executives' total package was dependent on performance, compared with international and Australian averages of 39 per cent. Mr O'Reilly said New Zealand's adoption rate of performance payments reflected the smaller scale and ownership of companies compared with many developed countries.

He agreed that greater use of performance pay was logical, offering significant potential gains.

The survey found that base salaries of chief executives in the public sector grew 5.7 per cent. Private sector base salaries grew 4.6 per cent. The median total package for public sector chief executives was $285,000, compared with $258,000 for the private sector.

British transport entrepreneur Brian Souter has re-entered the Wellington bus business, with Souter Holdings buying Mana Coach Services from merchant bank Bancorp.

The price has not been revealed. Mr Souter founded multinational transport firm Stagecoach and is still a major shareholder.

Mana Coach runs 120 buses in the Wellington region, including Newlands Coach Services.

Stagecoach New Zealand was sold to Wellington investment firm Infratil two years ago for $250 million. Stagecoach New Zealand runs scheduled bus services in Wellington and the Hutt Valley as well as Auckland.

Bancorp bought its stake in Mana Coach from the Waddell family in July last year for an estimated $24 million - a day after Infratil said it would appeal against a High Court decision preventing it from buying all of the company. Infratil already owns the remaining 26 per cent of Mana Coach through the purchase of Stagecoach. Bancorp described its purchase of Mana Coach at the time as a "long-term strategic investment in infrastructure". Infratil finally lost its appeal against the High Court decision last month.

Bancorp managing director Craig Brownie said Mr Souter made an approach to buy Mana Coach "three or four weeks" ago. Mr Brownie denied that Bancorp had been warehousing the shares on behalf of Infratil while it awaited the outcome of its appeal.

Infratil has consistently refused to say whether it had done a deal with Bancorp to buy the shares if the High Court appeal had succeeded.

Mr Brownie said Bancorp always had Infratil in mind as a potential buyer of the Mana Coach shares if it had been allowed to bid for them. "But it would be fair to say that New Zealand Bus would see Souter Holdings as a good co-investor long-term. "As a 26 per cent shareholder they had to be happy with the Souter company coming in. Even though they lost the court case, they are very happy about the outcome."

Returning the company to the control of a highly experienced operator was the best outcome for the business, he said.

Former Stagecoach New Zealand managing director Bill Rae has been appointed chairman of Mana Coach, replacing Mr Brownie, and Geoff Norman will continue as chief executive. Kerry Waddell has left the board, as a Bancorp appointment.

TOURISM Holdings is going into a joint venture with coach operator InterCity Group as it looks to drive further rationalisation in the tourism sector and reduce its costs.

THL said yesterday that it would be selling its Fullers Bay of Islands leisure cruising business and Great Sights coach tour operation to InterCity. The deal, effective on December 1, will see THL gain a 49 per cent shareholding in InterCity and take out $16 million in cash.

THL chief executive Trevor Hall said the new combined InterCity company would be "a significantly more profitable vehicle than either of us operating individually. We are talking in the multimillions (of dollars)."

In conjunction with the deal, THL is also restructuring its internal operations, which will include duplication of services that occurs at the moment in some areas such as reservations. This will see job numbers reduced by 30 by next April. Mr Hall said he was confident the staff would be able to be placed in other jobs both within THL and in other tourism- related businesses.

InterCity operates the country's largest coach transport network, connecting to more than 600 destinations and with over 150 services a day. It also owns the Kings cruise and tour business in the far North.

InterCity is controlled by Masterton's Tranzit Group and Timaru's Ritchies Transport. Tranzit is owned by the Snelgrove family and Ritchies by the Ritchie family. Nelson bus operator SBL also has a small stake in InterCity. The current shareholders will collectively own 51 per cent of the new InterCity Group. The new company will have an enterprise value of about $70 million.

Current chief executive Malcolm Johns will continue to manage the business.

Forsyth Barr head of research Rob Mercer said the deal was an excellent outcome for THL. "This transaction again highlights the upside potential from divesting/merging (THL's) leisure group operations," he said. "THL gains the benefit of maintaining a financial interest in the operations while at the same time releasing some of the capital -- $16 million -- tied into this underperforming part of its group assets."

Tourism Holdings is involved in a broad range of tourism-related activities. It owns attractions such as the Waitomo Caves and Kelly Tarlton's and operates motorhome, campervan and rental car businesses.

The company has been looking to focus on the rentals business, the most profitable part of its operations. An attempt early this year to sell its tourism leisure group, which includes assets such as the Waitomo caves, led to a $277- million bid being made for the whole company by Australia's MFS Living & Leisure.

The bid narrowly failed to reach the required 90 per cent acceptance level, and lapsed in late July. Mr Hall and his team have looked for ways to streamline the business -- the company sold two thirds of its interest in Johnstons Coachlines. THL shares closed unchanged at $2.30.
--------------------
CAPTION: Bolting ahead: THL will pocket $16 million from the deal with InterCity.