Editor Calls for Inquiry into Feltex (continued)

Back in Australia, Feltex had acquired an executive team along with Shaw. Sam Magill, Shaw's chief executive, was made managing director of the combined operation and Feltex became an Australian-run operation. Magill was an experienced carpet industry executive with previous management roles at Capital Carpet Industries and Invicta Carpets, both of which were taken over by Shaw. He was overseen by a steady board. Tim Saunders, the current chairman, joined the board in 1997. Peter Thomas, a Credit Suisse executive, had been on the board since the acquisition in 1996. Their credentials were emphasised in the 2004 prospectus. "Our senior executives are among the most experienced in the Australasian carpet industry and have the experience and market knowledge required to continue to grow the Feltex business," it said. A year later, in June 2005, Feltex announced that Magill was to "step down" as a result of "unsatisfactory financial performance brought about by the changing market conditions." The following month four more senior executives were removed. It was a stunningly fast turnaround. At its interim result in February, 2005 Feltex announced net profit up 7.1%, improved margins, higher sales of new products, and a continued focus on cost control. There was an interim dividend of 6c a share. Full year sales would be below forecast because of challenging carpet demand, but profit projections "remain achieveable." A month later came the famous profit warning--profit would be "between $8m and $9m less than the previous projection," a fall of 33%. The explanations put forward by Feltex were all to do with market conditions--exchange rates, consumer sentiment, import competition, raw material costs; there was a long list. None mentioned bad decision-making, inflated forecasts or inadequate accounting. Why was Magill to blame? A good CEO, as we were told he was, would be expected to handle a changing market. His board had known him for years, yet in a few months Magill turned into a lame duck, or worse. Feltex's explanation for Magill's axeing was pathetic. The huge discrepancy in the profit figures suggested serious internal problems, but shareholders were left to guess at the causes. Strangely, the board has never explained its decision to increase its term advance from ANZ by $22m--debt that paid for the interim dividend so smugly announced in February last year. From overall debt of $86.7m in 2004, borrowing ballooned to $110m in 2005. The earnings outlook was uncertain--it wouldn't take much to breach bank covenants requiring core Feltex debt to be no more than 3.5 times earnings. Were directors so desperate to pay a dividend, as promised in the prospectus, that they risked putting the company at the mercy of the bank? Another oddity: the prospectus said the Shaw Industries deal gave Feltex access to wholesale imports at competitive prices, insulating it from the risks of import competition. This facility was never mentioned again, despite cheap imports being cited as a major factor in Feltex's decline.

Related Topics:Shaw Industries Group, Inc.

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