Court reserves judgment in Bendon takeover row

By Karl du Fresne

Friday 2nd May 2003

Flamboyant Auckland economist Josephine Grierson's company Jowada Holdings went to the Court of Appeal this week seeking nearly $900,000 from Eric Watson's Cullen Investments in compensation for allegedly being cut out of a takeover deal.

The one-day hearing before Justices John McGrath, Robert Fisher and Rodney Hanson was a continuation of bitter litigation arising from Cullen's purchase of lingerie maker Bendon Group last year.

Jowada claims it is owed the money as a result of an agreement under which it was to co-invest with Cullen in the takeover of Bendon or be paid compensation if Cullen went ahead on its own.

Ms Grierson's company is challenging a High Court judgment that it was not entitled to the money because the "transaction" referred to in the agreement related to a specific type of takeover and did not necessarily apply to the deal that was eventually done a contention rejected by Jowada, which claims the agreement allowed for a variety of transactions.

The court was told that the deal between Jowada and Cullen came together after a chance meeting between Ms Grierson and Cullen Investments managing director Phil Newland in a restaurant in December 2000. The two had previously been colleagues at Enerco NZ.

Jowada counsel Bruce Stewart QC said Ms Grierson had identified Bendon as an under-performing company whose cash-rich balance sheet made it an attractive candidate for a leveraged buyout. She calculated that up to $20 million of an approximate purchase price of $60 million could be sourced from Bendon's surplus cash.

Mr Newland described Ms Grierson's proposed acquisition strategy as a "bloody brilliant idea" and an agreement was drawn up in March 2001 under which Jowada and Cullen would co-invest in Bendon on equally favourable terms.

The court heard that the agreement for the takeover of "Straps" Ms Grierson's code name for Bendon was approved by Mr Watson after he had spoken to supermodel Elle McPherson, whose name adorns a range of Bendon lingerie.

The agreement acknowledged that Jowada "reintroduced" Cullen to the possible takeover of Bendon a form of wording which recognised that Bendon had previously been on Mr Watson's radar screen.

The agreement specified that if Cullen decided to do the deal alone or with other parties, Jowada would be compensated fairly. The threshold for payment of compensation would be the acquisition by Cullen or its associates of 51% or more of Bendon. The compensation would take the form of an "advisory fee" calculated as a percentage of the transaction value.

Despite the provision for compensation, Mr Stewart said the strong preference of the Jowada team which also included former Farmers Deka Group chief executive Wayne Walden was to be involved as co-investors. The advisory fee was "very much a second prize."

Jowada believed it could raise $5-10 million equity which, assuming the total amount required would be up to $20 million, would give it between 25% and 50% of Bendon.

Cullen subsidiary Pacific Retail Group subsequently acquired Bendon early last year for $59 million, without any involvement from Jowada.

Mr Stewart said Ms Grierson began to suspect in December 2001 that Cullen was beginning to see her interests as superfluous to the deal.

On January 10, 2002 Mr Newland advised Ms Grierson that he had decided to fund the deal by raising $60 million, or 100% of the purchase price an approach that made no sense to Ms Grierson, who urged that he stick with the previously discussed formula of $20 million equity and $20 million in borrowings, with the balance sourced from Bendon's own surplus cash.

"It appeared to Ms Grierson that Mr Newland's $60 million equity proposal could only be rationally explained as a means of cutting her out of the transaction, as he would have known that the deal would have been impossible for Ms Grierson's interests on the basis of $60 million equity," Mr Stewart said.

On January 11, a Friday, Mr Newland sent Ms Grierson a faxed letter suggesting Jowada might have to come up with a minimum of $15 million for a 25% stake in the deal. Unconditional commitment and proof of funds would be required by the next working day.

Mr Stewart said Ms Grierson viewed the request to come up with $15 million over the weekend as manifestly unreasonable. It was the middle of the Christmas holidays and Mr Newland knew his demand could not be met.

The purported offer giving Jowada an opportunity to invest in Bendon was not an offer at all as it was incapable of acceptance, Mr Stewart said.

He said that when Ms Grierson met Mr Newland several days later to see if there was a way for Jowada to come back in on the deal, Mr Newland turned hostile, ordering Ms Grierson out of his office when she started to make notes.

According to Ms Grierson's account, Mr Newland said he had not wanted Jowada in the deal anyway and the only reason he had made the offer of January 11 was that he was told by Cullen's lawyers that he was obliged to do so under the March 2001 agreement. He then challenged her to sue, saying she would just be another in the queue.

Mr Stewart rejected Cullen's claim that the March 2001 agreement had come to an end after negotiations to buy AMP's crucial 26% stake in Bendon broke down over price. He said Mr Newland never conveyed this view to Jowada, and his assertions were not consistent with his continued contact with Jowada.

For Cullen, counsel Adam Ross expressed disquiet that the matters before the court were being dealt with by way of summary judgment rather than at trial. The case was essentially an attack on the credibility of Mr Newland and a great deal of the evidence was disputed.

Summary judgment was a very unsafe way of getting to the truth, Mr Ross said. Counsel were hamstrung by being tied to what was in the affidavits before the court, which did not necessarily reflect the full story.

He said the March 2001 agreement was an "incredibly loose document." When Mr Newland learned AMP was not prepared to go along with the proposed acquisition, "that was it as far as he was concerned."

Although the parties had occasional contact after that, that was no evidence of an ongoing arrangement.

Mr Ross said Cullen had learned during the discovery process prior to the court proceedings that Jowada's trading company, Pegasus Capital, had

talked to AMP about doing a deal with an offshore listed company. "That is consistent with the parties going their separate ways."

He argued there was no evidence that Jowada, a shell company with no assets, had the ability to co-invest on equal terms with Cullen.

The offer put to Jowada "You can have your share if you've got the money" was exactly what was contemplated by the agreement, Mr Ross said.

Pacific Retail Group had borrowed every last cent against its own balance sheet but Jowada had nothing and had effectively cut itself out of the deal. "This was a no-holds-barred hostile takeover bid where you had to be prepared to take the risk or it wasn't going to succeed."

He said it became clear in December 2001 that AMP was behind a buyout bid for Bendon by the company's chief executive Hugo Venter, who also had the backing of the Bendon board. That had completely changed the picture, Mr Ross said.

He said there was a "genuine attempt to get these guys [Jowada] on board" in a commercial environment that was changing constantly.

The judges reserved their decision.

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