Consultant tells Feltex hearing he turned down shares as payment a year out from float

Thursday 3rd April 2014

An Australian engineering consultant specialising in 'lean manufacturing' says he turned down an offer of shares in Feltex Carpets in the year before its initial public offering because he was concerned for the company's future.

John Blakemore, principle of Sydney-based Blakemore Consulting International, had been hired by US carpet maker Shaw Industries in 1999 to audit and advise on the adoption on lean manufacturing practices at its Australian unit, which was subsequently acquired by Feltex. He went on to advise the company until 2003, when the offer of shares was made, he told the High Court in Wellington.

Blakemore is a key witness in the lawsuit of Eric Houghton, who is suing former Feltex directors, owners and sale managers for $185 million in a representative action on behalf of 3,639 former shareholders who say they were misled by the company's 2004 prospectus. Feltex failed in September 2006, two years after going public.

He told the High Court that he declined an offer of shares in 2003 "because I did not see the company could be profitable." At that stage, Magill had flagged that an IPO was planned, he said.

Blakemore described a difficult relationship with local executives of Shaw, then Feltex, including former chief executive and director Sam Magill, who he said had been resistant to change in the company's manufacturing processes. Executives had belittled him in front of staff and had been uncooperative "from the beginning," he said.

"At all stages I struggled with senior management," he said. "It was clear they were averse to change."

He described lean manufacturing as "you only manufacture what you can sell" and said Feltex and the Shaw unit had tended to carry high inventory levels.

Feltex did manage some improvements in matching production with demand but "was still far away from being an efficient producer" and was poorly positioned as import tariffs came down and the company faced increased competition, he said. After he left, the company stopped matching manufacturing with demand, he said.

He was contacted again in 2005 by then chairman Tim Saunders, who Blakemore says told him: "John I wish we had stuck to your plan. " Saunders had disputed Blakemore's account of that phone conversation, the court heard today.

"In my opinion there was a significant amount of work to be done for Feltex to be a competitive company in a free-trade environment," Blakemore said. "If not, then the company would fail."

"That was "the reason I declined shares and demanded cash for my fee in 2003," he said.

As well as hostile managers, Blakemore said Feltex had poorly organised, poorly coordinated factories with old machinery and a rigid, unionised workforce that was fearful of management.

There was "a short window where Feltex could innovate and succeed" or stick to its old practices and fail, he said.

Tom Weston QC, lawyer for Magill, has only just begun his cross examination of Blakemore and has questioned what had motivated him to give evidence against former clients, given that meant disclosing potentially confidential client information.

Weston also asked whether Blakemore had seen the contract as a way to advance his career and secure "a great job."

Blakemore replied that a broader issue - the future of manufacturing in Australia - had motivated him to give evidence and in the case of Feltex it was a bankrupt company.

The case is continuing.

BusinessDesk.co.nz

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