THE DISTILLERY: Woolies wobbles

One commentator looks at Gina Rinehart's play for a bite of Fairfax, while others pick apart Woolworths.

Australia’s geographical remoteness has hardly been more apparent than through the prism of global law firms. In the past, local firms have been inclined to saddle up with larger practices in the UK and US, because that’s where the business was and we’re small fry in the middle of nowhere. But while the merger between Australia’s Mallesons Stephen Jacques and Hong Kong firm King & Wood finally announced the arrival of a new breed of global, Asian-based legal firms, The Australian’s Chris Merritt explains that Slater & Gordon’s acquisition of UK firm Russell Jones & Walker is turning just as many heads. Quite simply, it’s normally expected that UK firms take Aussie firms, not the other way around, and the Australian dollar is playing a part. Elsewhere, Gina Rinehart’s play for a slice of Fairfax will likely come with expectations of a board seat says one writer, while a number of commentators swamp the latest Woolworths numbers and the decision to scrap Dick Smith Electronics.

But first, it’s The Australian’s legal affairs editor Chris Merritt, who says the balance of power between Australian and British law firms could be shifting with the Slater & Gordon acquisition of the UK’s Russell Jones & Walker, partly due to the Australian dollar and partly due to regulatory changes. For the Australian lawyers, the new partners could generate 50 per cent of total revenue.

"Those opportunities have been made possible because Slaters is perfectly positioned to gain first-mover advantage in a new regulatory regime that permits outsiders to buy law firms. Those changes coincide with the strength of the Australian dollar and the difficulties British law firms could experience in tapping subdued British markets for equity and debt. "We are in quite a unique position and what has helped us quite a bit is the strength of the Australian dollar,” Mr Grech said. "It is a good time to be buying assets with Australian dollars overseas.” From the perspective of the 19 equity partners in RJW, the deal could not be sweeter. On average it has made them each $4.2 million better off. They are also joining the world's only legal practice with a successful track record in the type of regulatory regime unfolding in Britain.”

The Australian Financial Review’s Chanticleer columnist Tony Boyd says that if billionaire Gina Rinehart successfully wins her 15 per cent of Fairfax – Boyd’s employer – she’s likely to expect a board seat given that the mining baroness received one at Ten Network and Nicholas Fairfax was allowed to keep his Fairfax directorship with just 9.7 per cent. The question is how Fairfax chairman Roger Corbett handles the situation.

"Corbett would have watched with interest as Ten, following Rinehart’s appointment, changed its programming to include a new program by her favourite News Ltd commentator, Andrew Bolt. This could have been viewed as Rinehart influencing editorial decisions, which would be anathema to Corbett. However, this is not to say that a Fairfax board seat would be without power and influence… One way of looking at Rinehart’s move on Fairfax is that she is seeking to establish herself as a corporate player by making a small investment relative to her total wealth… Her ambition to be a corporate player appears to stem from her belief that she is not taken seriously. Ironically, a decision by Corbett and the Fairfax board to keep her out of the boardroom could be seen as confirmation she is a player to be feared.”

Meanwhile, The Age’s Adele Ferguson looks at the most widely covered topic of this morning’s business commentators, the latest Woolworths numbers. Ferguson says you can precisely measure just how determined Woolies chief executive Grant O’Brien was to get out of Dick Smith Electronics.

"That O'Brien booked a $300 million restructuring cost to Dick Smith to cover the costs of redundancies, off balance sheet leases, goodwill and inventory writedowns, says even more about his desperation to exit the business quickly... Leading retail analyst David Errington at Merrill Lynch questioned the size of the writedown given Dick Smith is capitalised at $400 million and only 100 of the 386 stores are closing. He didn't get a straight answer given the company refused to break down each component of the $300 million, but it goes to the heart of the company's motivation for selling a business as it simultaneously tries to renovate it. Why not leave this for a prospective buyer to sort out? Whatever the reason, O'Brien's decision to exit Dick Smith was decisive and sends a signal he will be a strong leader. And if it turns out that he over-booked the provision, he can look like a hero when he writes it back as future profit, something that might come in handy as it tries to rebuild growth momentum in 70 to 80 per cent of its business.”

And fourth in this morning’s Distillery, on the same story, is The Australian’s Bryan Frith. The News Limited columnist noticed that when Woolworths released its 2011 results six months ago, the supermarket giant expected after-tax profit would increase by 2-6 per cent in 2012, while conceding it was difficult to predict.

"This time around Woolworths has not given any update, although the fierce discounting war, which shows no signs of easing, is likely to have eaten into profit margins. The strategic review concluded that Woolworths' main strengths were primarily in larger format, multichannel, high-volume retail segments with market-leading positions. Dick Smith is a specialty consumer electronics brand with a large number of small stores which does not fit well with the company's core businesses. Moreover, the amount of management time and investment devoted to Dick Smith has been disproportionate relative to its position within the group.”

Staying with the Woolworths numbers for the rest of this morning’s business commentaries, the Herald Sun’s Terry McCrann can see the upside of a $300 million write-down when a subsequent stock price jump adds double that amount to the market cap. The Australian’s John Durie says O’Brien has little choice but to cut costs when customers are spending, while The Sydney Morning Herald’s Elizabeth Knight says the Woolworths chief used the phrase "boon for consumers” so many times in yesterday’s announcement that the only conclusion is that it’s the opposite situation for sellers – namely, him. Fairfax’s Insider columnist Ian McIlwraith points out that much of JB Hi-Fi’s surge yesterday could very well have been short-sellers covering themselves rather than a purely positive reaction to news that Woolworths is quitting Dick Smith.

In other company news, The Australian’s Andrew Fraser gives a most detailed account of the forces leading up to Clive Palmer’s audacious decision to sue QR National. Elsewhere, The Age’s Lucy Battersby finds analysts in a good mood when it comes to listed Australian telcos, while The Australian’s Criterion columnist Tim Boreham discovers education provider Navitas hitting trouble thanks to lower international student admission.

And in economic news, The Australian’s Adam Creighton investigates just how much Australia’s business investment tables are skewed towards Western Australia and Queensland. The Australian Financial Review’s Alan Mitchell says a rate cut from the Reserve Bank, considered a fait accompli, is actually quite finely balanced. Finally, The Sydney Morning Herald’s Ross Gittins takes lobby groups to task over economic modelling used to justify their industry. He’s talking about the ones that speak not only of the direct jobs created by, say, the car or mining industry, but the all-important and persuasive indirect jobs.

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