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Cavalier scouring merger would extract 'monopoly rents'

Cavalier group would extract 'monopoly rents' if scouring merger allowed, Godfrey Hirst says

By Jonathan Underhill

Oct. 5 (BusinessDesk) - A merger of Cavalier Wool Holdings and New Zealand Wool Services International's two wool scouring operations would create a monopoly that would use its market powers to hike prices as much as 25 percent, says carpet maker Godfrey Hirst.

The Commerce Commission on Friday released its second draft determination on the merger, maintaining its view that the public benefits would outweigh the loss of competition.

The regulator considered the biggest constraint on prices from a merged business could be scours in Asia, especially China, and cited the experience of Australia, where scouring plants dropped to three in 2009 from 25 in 1995, while volume plunged to 54,000 tonnes of greasy wool, or 14 percent of total production, from 600,000 tonnes, or 82 percent, in 1995.

"The commission also recognises that the Chinese scouring industry poses a significant long-term competitive threat to the domestic industry in New Zealand," it says in its draft report.

But Godfrey Hirst, which competes with Cavalier Wool Holdings group member Cavalier Corp and extended its dominance of the Australasian carpet market with the acquisition of the Feltex assets, said it was "stunned" at the way the regulator appeared willing to allow a monopoly to be created in the local market. Price hikes would ultimately be passed on to wool growers, it said.

The commission "admits that the CWH takeover would substantially lessen competition in the wool scouring markets and in the domestic customer wool grease market; would give CWH a monopoly on the supply of wool scouring services and the supply of wool grease post-acquisition; and entails potential price rises," Godfrey Hirst said in a statement. "Despite this, the commission has concluded that the so-called public benefits of the takeover, which include staff cuts and the sale of core industry assets, outweigh the likely negative impacts of higher prices and lower quality production."

The commission wasn't convinced by Cavalier's argument that barriers to enter into the New Zealand scouring market were relatively low, meaning a new competitor could easily appear.

Cavalier Wool Holdings is New Zealand's largest wool scouring business and the deal will see Cavalier Corp shrink its ownership from 50 percent to 27.5 percent in the scouring business.

The merged scouring business will be 55 percent owned by Cavalier, private equity firm Direct Capital and the government's Accident Compensation Corp, with WSI parent Lempriere taking a 45 percent stake. After the merger, pending final regulatory approval, WSI would separate out its scouring business to become a stand-alone wool exporter as a commission customer of Cavalier Wool Holdings.

Submissions on the latest draft determination are due on Oct. 15 with a final determination by the commission slated for Nov. 13.


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