United States retailer Lowe's Companies Inc is playing a dangerous game of bluff with its court action against Woolworths over the winding up of the Masters Home Improvement business.
If the US retailing giant is not careful, it will end up as a minority partner with no rights in a joint venture with the Home Consortium, which is buying the Masters properties for about $800 million.
David Di Pilla, who advised the Home Consortium and has invested his own money in it, made sure that his deal with Woolies contemplated the possibility that Lowe's might get bolshie.
Di Pilla bought a call option over the Woolies shares in the joint venture vehicle called Hydrox Holdings. When the option is called, he will have 70 per cent of Hydrox and Lowe's will own the remainder.
But this joint venture will be very different to the Masters joint venture. The Masters joint venture gave contractual rights to both parties.
Lowe's rang the death knell for the Masters joint venture with Woolies in January when it notified Woolies of its intent to exercise its put option held under the joint venture arrangement.
The exercise of the put option meant Woolies was contractually obligated to pay Lowe's the fair value of its ownership stake as of January 18.
Since that time, Woolies has been pursuing an orderly winding up of the Masters business.
Woolies revealed the fruits of that winding up process last week with the sale of Home Timber & Hardware to Metcash for $165 million, the proposed sale of $500 million in inventory by General American, and the sale of the Masters Properties to the Home Consortium.
Woolworths chief executive Brad Banducci attempted to ensure Lowe's were kept in the picture with a visit to the US several weeks ago.
But it is now clear that Lowe's chairman, president and chief executive, Robert Niblock, is not happy with the Masters exit plan.
The exit plan assumed net proceeds of $500 million, which means Niblock would only receive about $150 million. That suggests he would need to take another write-down of about $250 million.
Niblock's response to the Masters exit plan was particularly aggressive. He instructed Gilbert + Tobin to take court action that left Woolies in the dark.
The court action was leaked to the media before Woolies had access to the documents. Lowe's released a press release full of emotive language but lacking clarity about exactly how much more money they want to get out of the closure of Masters.
It is laughable that after more than five years, Lowe's should claim that it has been treated by Woolies in a manner that was "oppressive and unfairly prejudicial" to its interests.
The most extraordinary aspect of this last-gasp effort to force more money out of Woolies is that Lowe's played a role in creating the Masters disaster in the first place.
The Lowe's representative who worked inside Masters, Don Stallings, was quite open about the fact that the joint venture partners made many mistakes in the first couple of years.
During an exit interview in June 2013, just before he headed back to the US, Stallings said: "I'd be a fool to think we could come over here and open a multibillion-dollar business and not have some missteps along the way, but we've tried to make corrective actions as quickly as possible."
He conceded that inventory management systems were inadequate and that Masters had stocked brands that were not liked by customers.
After Stallings left the joint venture, Woolworths appointed a number of different managers to fix the business. But after investing a total of $3.3 billion, the company gave up and moved to liquidate its assets.
The winding up process included a clause allowing both Woolies and Lowe's to value the joint venture. A source close to Woolies said the valuations were "miles apart".
The joint venture arrangement enabled both parties to agree on the appointment of an independent third party to value the business. But there was never agreement on this.
Lowe's alleged in its press statement that "Woolworths has conducted the affairs of Hydrox in a manner oppressive and unfairly prejudicial to Lowe's, including by wrongfully and in bad faith seeking to terminate its joint venture agreement and by seeking to exclude Lowe's from the management of Hydrox."
It went on to say that "despite every effort to reach a fair resolution with its JV partner, Lowe's has been left with no other option but to seek the guidance of the court to achieve an equitable and orderly wind-up of the Masters business.
"Lowe's has acted in good faith at every stage in both the development and operation of Masters, and has been at all times an engaged investor, a committed partner and proud employer."
There are a number of lessons to be learnt from the messy disintegration of the Masters joint venture.
The first is a universal principal that has long been accepted by sensible business people: joint ventures never work.
They never work because the interests of each of the parties are usually at odds with each other.
In this case, the Lowe's idea for a home improvement chain was way out of step with Australian consumers. The business model was not suited to the Australian market.
That became obvious when the company admitted its buying practices were in tune with the northern hemisphere and not the southern hemisphere, which is where the products were sold.
A second obvious lesson is that joint ventures tend to have uncertain corporate governance. It is not quite clear who is accountable for the decisions that are made.
The joint venture gets loads of cash, but then there is no reckoning when the losses keep rising.
Joint ventures also have a habit of ending in tears. The end of the Masters joint venture is a classic example of two companies not being able to find common ground.
But instead of negotiating a rational outcome suitable to both parties, the minority partner has opted for an emotionally charged response that risks failing miserably.
