Green Party Spokesperson on Economic Development and Industrial Relations.

The Crash

The 2006 crash of Feltex came like a slow motion version of a car crash; you can see the inevitable about to happen but everyone seems powerless to do anything about it. Things had not been looking good at Feltex for some time. Within a few months of it being floated on the Stock Market in 2004 at a share price of around $1.70 per share the price started its downhill ride. Then came the first profit warnings that saw the share price drop to around $1 and on down to 75 cents.

On June 21, 2005 there was a further profit warning, the Chief Executive Officer (CEO), Sam McGill, resigned, and the share price slid further to 47 cents. Soon after, Godfrey Hirst, the Vanuatu-registered, Australian carpet manufacturer owned by a former New Zealand family, put in a bid to buy the company at that price.The Feltex Board refused the deal and the share price sank again. Coming into June 2006 rumours were strong that Feltex had overextended its credit line with its banker, the ANZ. The share price dropped further to around 12 cents per share.

As a Green Party MP, I was becoming increasingly concerned at what was happening. I was alarmed for those “mum and dad” shareholders who were seeing their life savings disappear, and concerned for the Feltex workers whose jobs were being placed increasingly at risk and who had already been through the same thing a decade and a half ago. On July 27 I issued the following statement that I believe reflected the view of most New Zealanders:

“Feltex Must Be Saved

“Iconic Kiwi carpet manufacturer Feltex must be saved, Green Party Community Economic Development Spokesperson, Sue Bradford said. She was commenting on the ongoing attempts to find a new cornerstone investor for the company while the value of its shares plummeted to new lows. Feltex is too big a Kiwi institution to be allowed to collapse. It employs more than 700 workers and is a large earner of overseas funds based on the value added manufacture of New Zealand wool. It is exactly the type of company that New Zealand needs now and in the future.

“This is the second time in recent history that Feltex has been in such a precarious financial position. The previous occasion took place when its former owner Equiticorp went into free fall. The cause of these problems does not lie with the competent and efficient Kiwi workforce and management but with boardroom battles and financial disputes.

“I also feel sorry for the mum and pop and institutional shareholders that bought into Feltex when it was floated on the Stock Exchange and who have now seen a tenfold reduction in the value of their shares,” Ms Bradford said. I wish the Feltex Board all the best in trying to find a new investor for the company. I fully support workers and their union, the National Distribution Union (NDU), during this difficult period. This Kiwi-made company must survive”.

Saviours?

First Godfrey Hirst made another bid for the company which would have seen shareholders get little - if any - of the 10 -12 cents that the shares were now worth. A couple of weeks later, Graeme and Craig Turner, the owners of Sleepyhead, announced that they were making a counter offer. As I watched this game being played out and as my researchers dug up more and more material about Feltex, its Board and CEO, its Initial Public Offering (IPO), the role of Credit Suisse First Boston that put the IPO together and the role of the Securities Commission, I became even more alarmed at what was happening. It seemed obvious to me that the shareholders, the workers and the country had been ripped off. But no-one was prepared to do or even say anything about it. I wrote to the Securities Commission but only received a self serving reply.

The Feltex Ripoff Is The Elephant In The Room

On August 30, I made the following speech in the General Debate in Parliament: “I want to talk today about one of the biggest rip-offs that has occurred in New Zealand for some time. The rip-off is so large that, to coin a phrase, no one seems to want to talk about the elephant in the room. It has seen thousands of New Zealanders lose a significant amount of money. It has placed the jobs of hundreds of New Zealand workers at risk. It threatens an iconic manufacturer.

“In the seven years I have been here I have heard a number of speeches about how beneficiaries and the poor are ripping off the system. A number of MPs in this House have got on their high horses and attempted to expose the wickedness of beneficiaries for failing to report overpayments of a few hundred or even a few thousand dollars as a scandal of national significance.

“So why are we all pretending that the $200 million ripped off New Zealand shareholders and workers by Credit Suisse First Boston Asia Merchant Partners has not happened? $200 million is the figure that a number of reputable business journalists have calculated has been expropriated from Feltex before, during and after its 2004 Initial Public Offering (IPO).

“Credit Suisse First Boston Asian Merchant Partners based in Delaware paid $19.5 million for Feltex in 1997 when it bought the company from the British based firm BTR Nylex. BTR Nylex had bought Feltex from the statutory manager of Equiticorp in 1989. Most of us will remember that Feltex was raided by Equiticop in the 1980s and that the head of Equiticorp, Allan Hawkins, was eventually convicted and jailed for fraud.

“Credit Suisse then created 120 million shares in 2004 which they subsequently floated in the IPO between $1.70 and $1.95 a share. Now trading for only 10-12 cents a share, these shares are now worth less than $15 million. So, around $200 million has disappeared; expropriated from mum, dad and institutional shareholders, and from Feltex workers; those who have created the wealth in the first place. Some of the $200 million went into the hands of some Feltex directors, some went into the hands of brokers Forsyth Barr and First NZ Capital who convinced New Zealanders to invest in the new Feltex, but most was expropriated by the faceless merchant bankers from Zurich and their Delaware subsidiary.

“How did this happen? How can we stop it happening again? Who is accountable for this expropriation and what are the consequences for those firms and individuals? In New Zealand we have a Securities Commission. It tells us that its vision is that ‘investors can have confidence in New Zealand's securities markets so that the markets increasingly attract investment from New Zealand and overseas’.

“So, I wrote to the Securities Commission on August 9 and asked it to undertake an investigation of (but not confined to) the following:

• the pre-IPO arrangements of Feltex and its then owners
• the forecasts and projections in the prospectus
• disclosures since listing.

“In addition to those questions I also expressed concern at the actions of the Securities Commission itself on April 27, 2004 in agreeing to nine exemptions in relation to the Feltex prospectus and IPO under the Securities Act 1978 and given this, how it could undertake an independent inquiry. On August 25 the Commission released a statement saying that it found ‘no breaches of the securities laws in the prospectus’ and that ‘no further action will be taken in regard to this matter’.

Whitewash Removes Those Nasty Carpet Stains

“What a whitewash. So now, for the second time in its history the proud, iconic Kiwi-made company Feltex has been ripped off by the merchant bankers. But no one wants to know. So what happens now? I know shareholders are determined to seek redress for this rip-off. We in this House should do all that we can to help them. But we need to be just as concerned with the future of Feltex as we are the past. As we know there are two current bids in for the purchase of Feltex

“There is a risk that the green light could be given to a foreign takeover bid for the iconic Kiwi carpet firm Feltex, without anyone in the chain of approval comparing the merits of an alternative locally owned rescue offer. Both the Australian firm Godfrey Hirst and Craig and Graeme Turner who own Sleepyhead have made bids for Feltex, and shareholders are expected to consider the Hirst offer in late September (06).

“I am told that the Hirst bid is also required to go to the Overseas Investment Office for approval. But I am also told that the Overseas Investment Office can only consider the alleged ‘net benefits to New Zealand’ of the Hirst takeover in isolation, and cannot seek to assess whether the rival offer from the Turners delivers greater net benefits to New Zealand. My own reading of the OIO guidelines suggests that if there was a will, the OIO could find a way to judge the net benefit of the rival bids. Dr Cullen’s August 1, 2005 Ministerial directive lists among the public policy objectives that the OIO are ‘to assess the benefits received from overseas investment applications on the basis of benefit to New Zealand as a whole’. Also, the OIO must ensure the value of sensitive New Zealand assets is ‘recognised and enhanced’ by an overseas owner.

“The Green Party believes it essential that at some point in the process, the foreign bid is put on the table and weighed against the merits of the locally-owned counter offer. Careful and considered analysis is required before the OIO reaches a decision, and its normal eight to ten weeks of scrutiny may need to be extended, especially given that the Feltex sale involves issues regarding the sale of land, some of which is in proximity to a reserve. Obviously, the OIO should not rush through an approval to suit Hirst’s commercial timetable. Over the past two decades we have seen too many examples of New Zealand firms being hocked off to foreigners in the mistaken belief that this will encourage the sort of foreign investment that is beneficial to the country. We have sold much of the family silver. Let’s not now rush into selling the family carpet”.

I received very good feedback regarding what I said in the speech. For once in the General Debate, the MPs present seemed genuinely interested. Business reporters quoted from what I was saying. There were numerous articles in the business pages about the Feltex fiasco. However our “regulators” still did not want to talk about the elephant in the room.

Sorry Ending

And we all know how the sorry saga ended. First Godfrey Hirst pulled its bid for Feltex on the basis that it knew it would not get the shareholder support that it required. The Turner brothers enlarged their consortium and made a bid that was acceptable to the Feltex Board. The final sign-off for the deal had to come from the ANZ Bank as Feltex was in technical breach of its loan repayments to Feltex.

The Turner brothers told the media that after lengthy negotiations they believed they had made a deal with the ANZ. There was a handshake and the Turners returned to Auckland to await the signed agreement from the ANZ which would see the deal become a reality. A fax was expected.on the night of September 21but nothing was received. However, there was plenty happening in Melbourne that night. At about 5 a.m. the next morning, NZ time, faxes did start arriving in New Zealand but they were not informing the Turners that they had bought a carpet company. Rather the faxes were announcing that Feltex had been placed in receivership by the ANZ Bank.

ANZ Strikes While Sleepyhead Still In Bed

The statement of the Turners later that morning (22/9/06) was instructive: “Given the significant public interest surrounding the future of Feltex, we felt it important to provide this opportunity to confirm developments overnight with respect to our rescue bid for Feltex. It is clear from statements and action from shareholders and Feltex workers and the Feltex Board this morning that the ANZ Bank’s decision is seen as rash, precipitous and as a turnaround on undertakings it had given to the company.

“In particular, that the ANZ had given Feltex an assurance that it would not take action prior to October 20 to allow a refinancing and recapitalisation package to be agreed and effected via a shareholder vote at the company’s Extraordinary General Meeting (EGM). Let’s be clear, this bid was put together and backed by some of New Zealand’s leading businessmen. It also had the support of the Bank of New Zealand to re-finance Feltex and become its bank going forward.

“The ANZ was in no doubt that we had the funding, the expertise and support of both Feltex shareholders and staff to take on Feltex and its obligations to staff, shareholders and creditors. As you know the ANZ Bank has now appointed a receiver to Feltex Carpets and its Australian subsidiaries. As we said, the Bank has taken this extremely serious action in the full knowledge that there was a fully funded rescue package to keep the company as a going concern and protect the interests of Feltex Carpets’ 1,300 staff, shareholders and creditors.

“As the Feltex Board has noted in their statement this morning, in its letter to the Company, the ANZ Bank noted the discussions with both Godfrey Hirst and the Turners but stated: ‘You have been unable to complete a transaction which will enable the ANZ to be repaid its debt in full. The progress of negotiations is no longer satisfactory to the ANZ’.This is despite the fact that the ANZ Bank agreed to write off a certain amount of its debt in connection with the deal reached between the Company and Godfrey Hirst in August 2006. In addition we had also agreed with the bank that the ANZ Bank would write off an agreed amount of its debt in connection with our proposal.

“The rescue package required the ANZ Bank to fund working capital for Feltex for the next month until the shareholder vote at the company’s EGM. At the completion of the sale of Feltex that amount was to be repaid to the ANZ. The ANZ was not prepared to provide that support to Feltex to enable shareholders to vote on the rescue package. We were concerned and surprised by the ANZ’s action to put Feltex into receivership as we had agreed a deal with them. We are looking at all our options now. We can't rule out the option of legal action, but we now need time to work through those issues. We want to reiterate that this will be an extremely difficult day and time ahead for Feltex workers and their families, shareholders, creditors and the communities, which rely on Feltex. Our thoughts are with them and we thank them for their support over the past two months”.

An Extraordinary Day

September 22 nd was an extraordinary day in New Zealand’s economic history. On the one hand Feltex was placed in receivership by the Melbourne old boy’s club. And on the other, one of Australia’s biggest companies, Progressive Enterprises, had just been defeated by the NDU and Engineering Printing and Manufacturing Union (EPMU) after a lengthy lockout of supermarket distribution centre workers. In an amazing display of solidarity, as Progressive Enterprises workers returned to work on the first day after the lockout had ended, Auckland Progressive workers held a spontaneous demonstration outside their local ANZ branch and Christchurch Progressive workers rallied at the local Feltex plant to join Feltex workers who had stopped work and gathered outside their factory until they had been briefed by the receivers as to what was going on.

Of course the scene was now set for the inevitable last act of the drama to take place. Feltex was now controlled by the ANZ Bank through the receivers. The shareholders were left with nothing and not even a say in the future of their company. The Turner brothers-led consortium decided not to continue bidding for Feltex. Godfrey Hirst did put a bid in. It did not need to get the shareholders’ agreement. I am not aware of it going to the Overseas Investment Office. The receivers announced that they were closing the Kakariki plant near Fielding and laying off about half the workers at the Christchurch plant. Another bombshell came a couple of weeks later when Godfrey Hirst announced that the whole of the Christchurch plant would close.

Some Good News & Some Unfinished Business

At the end of this fiasco there is a small amount of some good news. The NDU and EPMU were successful in securing the continuation of similar wages and conditions for NZ Feltex workers with their new employer, Godfrey Hirst. Godfrey Hirst has inferior wages and conditions at their NZ plants compared to those of Feltex. It seems that Godfrey Hirst did not want to buy a fight with the same two unions that defeated Progressive Enterprises. I am also advised that Godfrey Hirst is intending to invest heavily in the remaining ex-Feltex lower North Island plants. So it should – after all, it bought Feltex for a fraction of the price that it was prepared to pay a year ago. It can afford to upgrade. If this comes about it will be good news for the workers and communities in these areas.

Although the dust is now settling on this latest Feltex fiasco, there are still many unanswered questions. I would like to see an Inquiry conducted into all the matters arising from the Feltex IPO and its subsequent collapse. I would like to see some justice for the shareholders who lost everything. If we cannot get a Government or Select Committee inquiry into the matters surrounding the collapse of Feltex then we need to hold a People’s Inquiry. A job for CAFCA? (CAFCA discussed this and thought the Feltex unions were best placed to organise such an inquiry. Ed.) And who said capitalism is the most efficient and sustainable economic system available to us?

ANZ is one of the finalists for the 2006 Roger Award, with its shabby role in the Feltex fiasco being one of the reasons why. See elsewhere in this issue for the full list of finalists. Ed.