“You don’t need to be very bright to realise that a company worth $90 million one moment is unlikely to be worth $500 million 12 months later just because it had a change of ownership.” – Dick Smith
And doesn’t this quote say it all? The other question being, how exactly does the market do this, on what basis and ultimately how does this happen that another Australian retailer slides into voluntary administration?
393 shops, 3000 employees at employment risk, customers frustrated with returns and gift cards not being honoured, shareholders at less than 10 per cent of their 2014 investment, yet $500 million generated in funds. A train wreck waiting to happen?
In an October 2015 blog post titled Dick Smith is the greatest private equity heist of all time Forager Funds analyst, Matt Ryan, outlined how Anchorage Capital stripped inventory from the retailer before bringing it back to the public market. (Forager Funds has never owned shares in Dick Smith Holdings.) The fascinating aspect of this acquisition and revaluation is the manner in which Dick Smith effectively financed its own purchase.
As a case study in “How to make $500 million from a business valued at $90m while only paying $10 million” it is without peer. I encourage our readers to read this fascinating approach.
Was the role of the PE firms (shades of the Myer float?) the beginning of the imperfect storm for Dick Smith? It effectively escalated the Dick Smith business to a value that was simply exponentially overvalued becoming the domain of the short seller.
Anchorage Capital bought Dick Smith from Australian retail giant, Woolworths, in a deal worth $115 million in 2011 and floated it with a market capitalisation of $520 million less than two years later.
If you or I bought shares at $2.20 a share when private equity firm Anchorage Capital Partners floated the company for $520 million in December 2013, our investment would be worth less than 20c per share today.
Did this action raise untenable incentives for the executive fostering poorer decision making?
Was this also in concert with the parallel rise of its competitors such as JB Hi-Fi and Harvey Norman?
Perhaps the fluctuating value of the Aussie dollar and offline sales?
More likely the following from Mr Johnson at Deutsche Bank:
Mr Johnson said Anchorage Capital brought Dick Smith back to the public market with a weak balance sheet that “looked ok” because the company was not laden with debt.
“But it had a serious lack of inventory. Replenishing stock meant taking on debt and pushing suppliers too hard,” he said.
“If sales had been performing strongly, the company may have been able to pull that off, but the combination of weak sales and weak balance sheet could prove lethal.”
So please let yourself be the judge as to whether this was just a once iconic Australian retailer losing its way in the changing complexities of the marketplace or was it ultimately just a lamb to the slaughter?