Scouring for profit: how the Michells fleeced themselves

A decade after a massive buyout, the Michell Group is rich in assets and revenue, but cash-flow poor. And tough conditions in the wool industry give little cause for optimism.

South Australia’s Michell Group used to be one of Australia’s great family businesses. At one stage the Michells dominated the national wool clip and more or less owned Adelaide, but two family splits in ten years fragmented this historic firm like a badly-shorn fleece flung onto the table.

Mind you, what’s left of George Henry Michell’s legacy, now owned 50/50 by two fifth-generation brothers, David and Peter Michell, still turns over $100 million a year and accounts for 20 per cent of all global wool through factories in China and Adelaide.

The problem is that they can’t make a profit and barely draw a salary. These days, wool scouring is the lowest-margin business imaginable.

David and Peter are hanging in there, deeply conscious of their family’s heritage and cutting costs as hard as they can as they wait for wool to make its comeback as the fibre of choice for both fashion and sporting gear.

But will it? Sure it will.

George Michell arrived in Adelaide in 1866 from Cornwall, on board the Trevelyan with his wife Catherine and his mother Catherine. He plied his trade as a bootmaker for a while before taking up farming at Undalya, south of the Clare Valley.

Turned out he was good at trading wool, as well as scouring it, which he did on the banks of the Wakefield River. By the time he retired in 1909 and left the business to his three sons, he was a rich man, and his offspring took over a thriving wool-scouring business as prominent leaders of the Adelaide community.

The third generation in the business consisted of two brothers, Ron and Will, and their third cousin Howard, 20 years younger. Ron was managing director of the Michell Group for 40 years, and was David and Peter’s grandfather.

Fast forward to 1992, and Ron’s son John, and Will’s son Ray are running the business. Ray had helped set up Family Business Australia and took seriously the operation and succession of a family business, so in the early ‘90s he established a family council.

The first meeting was at the Snooty Fox restaurant in North Adelaide, and 40 cousins, uncles and aunts, all descendants of George Henry, attended. Under Ray’s leadership, they met four times a year.

But the Michell family councils turned out to be one of those ideas that seemed like a good one at the time, designed to bind the family together, but ended up doing the opposite. It just brought to the surface all of their differences and, by 1995, 45 per cent of them wanted out.

And so a mediator was hired, two rooms were rented in an Adelaide hotel and, with the mediator shuttling between the rooms, took four hours to negotiate the split.

It was a fairly simple deal: John and Ray, plus a second cousin named Richard, agreed to raise $80 million by selling 250,000 acres of farmland and buy the others out.

But even after the split and the compression of the ownership down to three family groups, the shareholder register still grew to be 38 cousins in less than a decade. Once again it was time for another split. This time it was John’s two sons, David and Peter, who pushed the buyout.

At that stage the business consisted of the wool scouring business, a leather business that was tanning 35,000 hides a week and 19 acres of office/warehouse complex in Botany, Sydney.

And once again it was the old two rooms and a shuttling mediator. The deal agreed was that the tanning business would be sold for cash and the exiters would get the Botany property. There was no cash equalisation because they agreed that the Botany property was worth the same as the wool business, which is what the brothers wanted.

Now they’re not sure that was such a good call. With Chinese competitors coming in and cutting prices, wool scouring has gone from being tough (2001 was the worst year ever, at that point) to even tougher.

In 2006 David and Peter built a factory in Suzhou in China on the grounds that if you can’t beat them, join them. That has gone passably well.

But a decade after the buyout of their 38 cousins, David and Peter find themselves asset- and revenue-rich, but cash-flow poor. It’s the sort of predicament in which members of the British aristocracy tend to find themselves, and perhaps that’s a bit appropriate since the Michell’s are part of the aristocracy of Adelaide.

David and Peter have five children between them. David’s two elders daughters, Nicola, 25, and Emma, 23, work in the business (for salaries) and there are still "mini family councils" held every few months involving all the children. Peter’s two are still in primary school.

Like a lot of scions in great old family businesses like the Michell Group, David and Peter are profoundly affected by the weight of their heritage.

It’s why they bought out their cousins and why they built a factory in China. In fact, it’s fair to say the sense of George Henry and their other ancestors peering over their shoulders defines every day of their management of Michell Wool. Will the business pass to a sixth generation? Hard to say. Who knows?

Perhaps a better question is whether the business will ever again produce a return on equity that would make it worth inheriting.