Cockatoo tells story of a screeching halt

Chris Bowen could not have hoped for a better example than the ''collapse'' of Cockatoo Ridge Wines on Wednesday to support his submission this week that laws on insolvent trading need an overhaul.

Unfortunately for the Financial Services, Superannuation and Corporate Law Minister, the downside for him and the rest of the Federal Government is that Cockatoo calling in the corporate undertakers might be just the first sign of what is shaping to be a very ugly vintage in the wine industry - and it has nothing to do with the quality of the coming harvest.

Cockatoo's board put the company into administration even though it had strong, positive cash flow figures from December trading. Their concern was that in about a month they would need to commit on grape-buying contracts as the fruit matured, and would need to finance that crop.

The chairman, Stuart Richardson, said the board members believed that if they made those commitments the company risked trading while insolvent - a risk they were not prepared to take because of the potential personal penalties.

That is why Bowen is asking whether the law ought to be changed. If the risk for Richardson and fellow Cockatoo directors had not been so great, and had they had a moratorium to trade while insolvent without those personal risks (or abusing the interests of shareholders and others), perhaps the outcome might have been different.

Technically, Cockatoo was insolvent at June 30 last year when current liabilities outnumbered current assets more than two-to-one, but Richardson said that was only because under accounting rules it had to declare due and payable all its borrowings from banker GE Commercial because it was in breach of lending covenants.

As such, few investors in Cockatoo would have been surprised at this week's events, and the board's thinking (not forgetting Richardson and a fellow director, Ivan Limb, are among the largest shareholders) was that there was enough time for the administrators to devise a way Cockatoo could fund its next vintage, or sell its assets.

The real issue, however, is the glut of wine washing about Australia. Much of the industry's difficulties were, arguably, created by an indulgent body politic in Canberra - begun under former prime minister Paul Keating and maintained for too many years under John Howard.

Briefly, Keating compromised on a sales tax increase in the mid-1990s, recommended in a Productivity Commission report, and a series of other measures were implemented, including the tax-effective managed investment schemes in the early life of Howard's government that encouraged grape growers and winemakers to spend more than a decade over-capitalising the industry.

The deal worked nicely when world demand for Australian wine was on the rise, and the big makers such as Foster's Group and Constellation Brands (then BRL Hardy) led the way in planting vines to support aggressive expansion into Britain and the US. For a while many a clapped out, prone-to-flooding sheep farm was being transformed into vineyards because the returns were exponentially better.

In the past year or so, however, the much stronger Australian dollar has combined with a reduction in consumer spending in the US and Britain thanks to Ye Olde Financial Crisis to make exports much less profitable. That has caused a lake of wine, once destined for export, to be drained into the domestic market.

For consumers here that has, happily, led to much cheaper wine but winemakers and grape growers have been crushed between low prices and a backlog of stock.

Cockatoo was little different to others - having built its brand in the ''affordable'' end of supermarket trade, it had geared itself to push hard into exports. But they suddenly became unobtainable.

It was not helped by a problem peculiarly of its own making in risking too much on a multimillion-dollar bulk wine sale to industry hero John Casella's Yellow Tail. That deal went horribly wrong late in 2008, apparently not through any fault of Cockatoo or Casella, and may yet turn up in South Australian courts.

When Richardson, an investment banker, took over from wine industry stalwart Limb as the Cockatoo chairman in mid-2009, he began stripping costs - slashing staff from 30 to 12 and telling managing director Peter Perrin that he and his $300,000-a-year-plus salary were surplus to requirements.

Late last year Richardson tried to sell Cockatoo's winery, but when you have a glut of wine you also have a glut of processing capacity, so he failed to get the $7 million to $8 million it was probably worth, and instead bought some time (and cash) by leasing it for a year to Kingston Estate.

Richardson may also have been one of the few cheering when the managed investment scheme specialist Great Southern fell over last year. It was one of Cockatoo's contract grape suppliers - product the company was unsure it could afford this year.

With majors such as Pernod Ricard's Orlando already taking $60 million hits to the balance sheet, and Constellation trying to get the heck out by selling its operations to Australian Vintage Ltd, there is a lot more for the industry (and Canberra) to worry about than drought in a pre-election year.

Estimates are that over-production of wine is 100,000 cases, or about 35,000 hectares of vines that need to be pulled out. Even that will not relieve a probable two years of industry agony - unless, of course, the politicians find a voter-friendly way to offer some relief to industry participants.