In late 2002, long before I lost control of Moneyweb, erstwhile colleague Stewart Bailey and I went to Australia with two objectives. The first, successfully concluded, was to establish an office in Western Australia for our rapidly growing global play Mineweb.com. The second was to explore a partnership with a Moneyweb-lookalike website in Sydney, egoli.com.au, owned by the stock brokerage run by Harold Shapiro, brother of my friend and regular market commentator David. The deal was never concluded, mainly because it would have required me to relocate. But during nine eventful and fascinating weeks I enjoyed a close-up look at the Australian business scene – including visits to numerous subsidiaries of South African listed companies. During that time I also met Ian Moir, now Woolworths CEO, who was running the group’s Australian operation. And encountered Australian retailing billionaire Solomon Lew who has a deep distrust and dislike for the South African operation – a fact which resurfaced when Woolworths launched a $2bn takeover bid for David Jones. My piece from that time is republished as useful background for those with shorter memories trying to understand why Lew is intent on attacking Woolworths’ Australian expansion ambitions – again. – AH Â Â
By Alec Hogg: written in December 2002
PERTH – Leading South African retailer Woolworths (JSE: WHL) could hardly have picked tougher opponents in the struggle to turn to account a $137m (R800m) investment in Australia made four years ago. The investment landed Woolworths an 88% controlling share in loss-making clothing business Country Road (ASX: CTY). The biggest minority shareholder refused to sell, with its stake just big enough to ensure the SA group couldn’t delist the subsidiary. It’s become nasty. Waving the flag for the adversaries is Michael Kroger, a trained lawyer who now makes a living as a merchant banker, but is better known as a lobbyist and political power-broker. His client is billionaire Solomon Lew, whose ARI owns 11% of Country Road. These are clearly no ordinary shareholder activists.
The stock has a free-float of less than 1%, so with few other shareholders around to rally support from, it’s no surprise Kroger has selected the media as the battlefield. Unlike the low profile Woolworths executives, it’s an area where the highly articulate Kroger operates with great ease. Kroger has lobbied professionally for media mogul Kerry Packer’s PBL, whose market leading TV station Channel Nine used him as its on-air political analyst in coverage of last November’s General Election. He is also a board member at the State-owned Australian Broadcasting Corporation and still in his 40s, Kroger has the energy and ambition to use undoubted media savvy to his own and clients’ account.
But it’s Kroger’s political affiliations that make him even more dangerous to his South African opponents who, he says, should pack up and leave. Kroger is a former President of the ruling Liberal Party’s caucus in the state of Victoria. He’s also a bosom buddy of Peter Costello, the country’s Treasurer (Finance Minister). Their friendship goes back to the early 1970s when together they spread the Liberal Party’s message when Kroger was President of the Monash University chapter. Married to the daughter of Australia’s Ambassador to the US during the Clinton Administration, Kroger’s affiliations reach to the very top. Shortly after being elected, Australian Prime Minister John Howard referred to Kroger’s “great” leadership, adding “my friendship with him has been something of which I’ve been very proud and very publicly vocal, no matter what the circumstances.”
While Kroger is the public face, his client Solomon Lew (56) is the real opponent in what is ultimately a corporate battle for control of Country Road. In a profile published over the weekend by The Australian, Lew is described as “a cautiously, immaculately groomed Jewish businessman who avoids the spotlight like Dracula avoids sunlight.” One of three children of destitute Polish immigrants, Lew’s father died of a heart attack when the lad was just 12. That provided the background for an against-the-odds success story which saw him build a retailing fortune and attain chairmanship of the 2 000 store, R140 billion a year Australian retailing giant Coles Myer. Lew, currently in the news because he is leading efforts to resuscitate Australian icon Ansett Airlines, is estimated to have personal assets worth R5 billion (A$850m).
The latest flurry against Woolworths by Kroger and Lew follows Friday’s announcement that Country Road (ASX: CTY) is to close almost a third of its retail outlets by exiting the US market. Shutting the American shops requires a R137m write-off onto Country Road’s balance sheet. It is a major setback for Woolworths’ Australian subsidiary after the early success of a turnaround strategy which saw Country Road achieving a modest profit two years after the South African acquisition (12 months to June 2000). But the bottom line slumped back into the red last year and Friday’s announcement re-iterated that shareholders should expect another significant operating loss from Country Road in the six months to end December 2001.
That’s manna for Kroger who told me over the weekend: “We warned them not to expand into the US, which is the toughest retailing market in the world, but Woolworths went ahead and did it anyway. We think well of (Woolworths MD) Simon Susman, but not when he’s outside his own market. They haven’t a clue about retailing in Australia and because of their failures it’s been hard for Country Road to attract the best people – there’s been huge turnover among senior executives, the latest in December when the chief financial officer left.”
His public record paints Kroger as a free marketer, fiercely anti-trade unions and a disciple of the benefits of globalization. Even so, he’s not averse to playing the nationalistic card: “Country Road needs an Australian board and Australian management. Woolworths brought in the British guy Ian Thomson as the managing director and replaced him with a Scot, Ian Moir. They’re foolishly going to kill a good Australian company because they don’t know this market. They have had to put in R50m from South Africa because the Australian banks have told them to nick off.”
Country Road was founded in 1974 and operates through 170 wholesaling outlets, primarily in Australia, and a sizeable retail network of its own 40 stores in Australia, seven in New Zealand and a presence in Singapore, Indonesia, Hong Kong and Japan. In that context, the 18 stores being shut down in the US is significant. Solomon Lew’s ARI started accumulating Country Road shares in 1997, but according to Kroger “felt Woolworths paid too much for the company ($2 a share) when they bought it in 1998.” The rarely traded share’s last price was $1.50. Kroger sees no early end to the friction: “We’re patient and are prepared to sit out the ongoing stalemate. The Lew family have a reputation of sticking with their investments for five to 10 years.”
Lew has been notoriously shy of the media since negative publicity forced his resignation as chairman of Coles Myer in 1995. This was a direct result of the so-called Yannon scandal which, The Australian explains, erupted after “a complex financial transaction was revealed which effectively involved the transfer of A$18m (R105m) in losses from Lew’s private interests to Coles Myer.” A subsequent inquiry by the Australian Securities Commission lasted four and a half years, but no charges were laid against Lew who claimed throughout to have no knowledge of the substance of the transaction. Although never re-instated as chairman, Lew is still a director on the Coles Myers board.
