The agony and the agony: Dick Smith's journey from private equity plaything to IPO

Dick Smith managing director Nick Abboud

Forsyth Barr's Rob Mercer discusses Dick Smith troubles with Duncan Bridgeman and Andrew Patterson

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It was appropriate that it was Forager Funds chief investment officer Steve Johnson who predicted "Receivership could be round the corner," for Dick Smith.

"Dick Smith is a very niche business and it is getting out-competed by Harvey Norman and JB Hi-Fi," the analyst said as shares went into a trading halt on Monday.

Dick Smith director of investor relations David Cooke responded that the company intended to resume trading by Wednesday. But before Tuesday morning trading began, it was announced Dick Smith had indeed been placed in receivership.

Forager Funds is already off the retailers Christmas Card list following its much-quoted October blog post titled "Dick Smith is the greatest private equity heist of all time".

Anchorage Capital bought Dick Smith from Australian retail giant Woolworths in a deal worth $A115 million in 2011 and floated it with a market capitalisation of $A520 million less than two years later. According to Forager Funds, Anchorage "used all the tricks in the book to turn Dick Smith from a $A10m* piece of mutton into a $A520m lamb." They included (in Forager's words) pre-IPO inventory stripping, ripping cash out of the business, and aggressive accounting around write-downs and how profitabiity was presented to potential investors in the public float.

Anchorage sold its final 20% for $A2.20 a share in September 2014; ahead of the trading halt, shares were at 35 cents.

The troubled retailer Dick Smith's ASX-listed shares were placed in a trading halt yesterday.

A brief market statement by the company [ASX:DSH] says an announcement is pending in regard to its debt covenants. A debt restructuring was expected. Dick Smith had $70.5 million of total debt as of June 28, according to its annual report.

Dick Smith hit business press headlines on November 30 as its shares plunged 58% in a day, wiping $A90 million from its market cap, as the retailer abandoned its profit forecast and it would have to take a $A60 million write-down on stock.

Shares were already under pressure after the company warned on October 28 that profit full-year profit would be $A5-8m below previous guidance of $A45-48m.

While many retail chains have been under pressure — especially in the consumer electronics space — as the deal with the rise of e-tail, Dick Smith has faced the added challenges of being a financial plaything as its the private equity owners who bought it from Woolworths wheeled and dealed to maximise their profit. Then, when the wheels started to come off, vulturish speculators built up huge short positions (for details of the sorry saga, read Tim Hunter's The big Dick Smith short).

Dick Smith ran a huge sale in the build up to Christmas, which has continued into the New Year. While the promotion has featured some killer deals, such as HDMI cable (usually up to $40) for $1, UBS said it would not have much impact on rivals like JB Hi-Fi because key product lines like Apple gear were not subject to large discounting. Promotional emails from Dick Smith have listed 10% discounts on some Apple products. The big discounts were reserved for Dick Smith's house brand products, which are often low-cost peripherals.

In early December, Dick Smith said it might have to write down stock further, depending on how Christmas sales went.

Shares, which were $A2.20 at the time of Dick Smith's 2013 IPO, were at 35 cents ahead of the trading halt.

* Anchorage also made subsequent payments to Woolworths for a total payment reported variously as $A94 million or $A115 million


POSTSCRIPT: I was one of those who stocked up on HDMI cables during the Dick Smith sale. At $1 each, it seemed rude not to. I soon realised I had paid an extra "price" as special marketing emails began arriving from my inbox. While each has the legally-required Unsubscribe option, I've stayed on their list out of morbid fascination of just how much Dick Smith would spam me. So far it's run to an average four messages per day (confirmed by a keen NBR reader who has kept a spreadsheet). So far the company's yet to tempt me to buy a big ticket item, or indeed any extra item.

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33 Comments & Questions

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You can get 1metre hdmi cables from aliexpress.com for US$1.29

It gets delivered to your door or mail box so you save on petrol and travel time. This item is free shipping. It says 15 days or longer but I have received some items within 7 days. I suspect the delay is waiting for NZ post to get its act together as it is sent via air mail from China.

http://www.aliexpress.com/item/Wholesale-300pcs-lot-Ultra-Slim-HDMI-Cabl...

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Spot on - we are getting ripped off big time in NZ when you can get an item delivered from overseas for less than what it costs for just the local mail. I ordered an edison to screw light bulb adapter from china via ebay for 99c INCLUDING postage. Costs $10 just for the item in one of the local stores.

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All pointing to Dick Smith's dumb decision to buy squllions of these HDMI cables (gold plated points etc etc) at maybe $10 to sell at $40 when tests show cheap or expensive, gold plated or nickel plated, they all do the SAME job.

Wonder how many of these dud products Dick Smith bought, trying to con consumers but ultimately, conning itself into receivership!

Purchasing managers in Dick Smith must be working for the suppliers?

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I will admit to buying gold platted cables for some purposes and paying extra - simply because they are going into highly corrosive environments but otherwise I simply don't care.

I buy local because I need an item and want to check it first, clothing, or it is not available in the same form from overseas. Dick smiths problem is that for a lot of items it is either more expensive than overseas (and not time critical), or there just isn't the demand (look at the recent fire-sale which didn't sell as much as they hoped/expected)

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Never buy from Private Equity - Never

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The Australian Venture Capital Industry Group (AVCAL) and Rothschilds have reviewed the performance on Private Equity backed IPOs and non PE backed IPOs in Australia. They looked at IPOs in 2013, 2014 and 2015 - with a minimum offer size of more than $100m. Covered 65 companies of which 30 were PE backed, including Dick Smith.

The returns for investors in PE backed IPOs was greater than for non-PE backed IPOs other than in the very short term post listing.

Since listing the returns on PE backed (simple average) was 37% verses 22% for non PE. And on a weighted basis the returns are 24% (PE) verses 17% (non PE). Although the fall in the Dick Smth price since ealry December will probably narrow the gap a little.

So I think the comment of never buy from a PE will mean investors miss on some good opportunities. But like any investment it is all about buyer beware.

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With all due respect who would believe a study conducted by the very industry that has screwed over investors for years - a bit like Mark Hotchin and Eric Watson doing a review on how Hanover Finance compares with other failures - I am sure even they could find one bizarre ratio that compared well for Hanover!!!

The facts are that the PE industry has an extremely poor recent history of over selling investments they exit via the sharemarket - almost without exception.

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Point taken that people can be selective in their data etc, but as they have disclosed all of the companies in the database etc someone can easily check their calculations.

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That is an emotional knee jerk reaction from someone emotionally wedded to hating finance.

NZ PE had don famously well for both its investors and who buy their assets. NZ pe is backed by NZ Super and ACC, amongst others, and these investors have made a lot of money from their backing of local private equity.

Local private equity are more private company investors rather than the LBO barbarians at the gate seen in AU or the USA. They work with and partner with Kiwi companies over the long haul and have a good corporate citizen track record - this isn't the case with Australian firms.

Finally there have been some very good floats - DC's float of Scales has been a real success for all investors - and they invested over $50m into orchard development over the period of their investment which was highly positive for the company.

Perhaps the NBR should differentiate the fact that Dick Smith was an Australian company, listed in AU not NZ, that had been public for over two years, before it was listed by an Australian PE firm. NZ doesn't have LBO private equity firms - just firms that specialise in investing in private companies and don't deserve to be tared with the same brush as Anchorage and AU private equity.

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Ralph, thank you for your comment. There is far too little fact in online media, stories are often tainted by emotional public comments (after the body of the story) and I appreciate you taking the time to share some facts for once.

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Hear hear. And as for Dick Smith, the company IPO'd 2 years ago. So that is 2 years of public equity analysts and investors scrutinising the company and its results and asking management the "hard questions". The share price only started declining in the past few months. So the ones who lost their shirts here are the public equity investors who didn't do their jobs, understand the accounts and get out earlier. The private equity firm that IPO'd this business kept a material shareholding for around 12 months after the IPO before selling out. Perhaps people should learn something here and actually invest MORE of their savings in private equity, rather than with dumb-money listed equity managers who just want to track an index?

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Why is it that all these comments in support of private equity come across as much the same as those from real estate agencies who talk up the need for their over priced services? Frightened that the general investing public might finally wake up to one of the biggest con jobs of the last 30 years and the bloated gravy train is over?

Private equity reminds me of real estate flickers who buy up worthless old dumps in bad neighbourhoods, slap a bit of paint and pearls on the pig, and then flog it off as a major refurbishment offering an outstanding lifestyle/ investment opportunity in an up and coming area for the astute investor or home owner. But the reality is it's still a pig in a bad neighbourhood with lipstick on. And when it all turns to custard a few years down the track, it's never the flicker's (private equity's) fault.

It is generally well understood from hard won experience derived from right around the globe, that you don't buy into an IPO of a company that was taken private and then fixed up by private equity. Not only have they taken the cherry on top, they've eaten it and most of the bananas too.

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That's actually completely wrong. There is a mountain of research data proving private equity is the best form of investing for both investors and companies.
As an investment class, it massively outperforms listed equities and that's why all the big US endowments and US/global pension plans have big allocations to private equity. Here in NZ and over in Australia it has been hugely successful for pension investors as well, benefitting...wait for it...you and me and everyone!
From a company perspective, those companies that have private equity investment grow faster and are more profitable than listed companies on average.
Actually, most private equity investors are very focused on buying the best companies with the best potential and mapping them to the best management team - they are smart investors who do their diligence and avoid buying 'dogs' because they know it's more profitable to make a good business better than try to turnaround a wreck. Dick Smith was a specific case of a 'turnaround' private equity investor buying a troubled subsidiary off a big corporation, doing some running repairs and then IPOing it. Anchorage didn't set the price when they IPO'd, the institutional equity investors did. They were the ones that didn't do their work during the IPO roadshow and paid too much, and then didn't do their work over the next 2 YEARS (!) post IPO and get out before the company hit the wall.
If you do some basic google research you can read all the facts yourself. Better than just criticising based on rumour and innuendo.
Finally, why does private equity work so well? A number of reasons: private equity investors get management to invest a lot of their own money in the company (more skin in the game than a public company CEO); they provide capital for growth; they set strategies for long term value growth not short term earnings; they bring 'active shareholder' oversight and being in control can rapidly change course if things go wrong. It's a great recipe and actually one that public equity investors try to replicate (largely unsuccessfully). Ever heard of management share options? Activist shareholders?
Kiwis should be demanding more private equity investment in their Kiwisaver plans - it's a no brainer.
All of the anti-private equity rhetoric in the media is just because it sells papers based on envy of successful investors. Funny though that the media doesn't beat up Warren Buffet for buying companies the same way...guess it's all about the spin.

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Few points
- A number of those offerings where not genuinely available to retail investors at the stated listing price (esp. Virtus and Veda) - so the starting price should be T+1 (to account for the pop retail investor rarely get these days)
- A lot of the non-PE comps are real estate (industry bias)
- Dick Smith is the fourth youngest vintage in the data set, wait till all the escrow rolls off the others in the PE population and then lets talk results. Especially want to see what the future holds for winners like MYOB, Spotless, SG Fleet and PAS

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Thanks Bob for the comments and they are all valid.

- the pop as you call it was similar for both groups around 6% on listing and the first month, so performance post that would still show PE outperforming non PE.

- Looks to me that Aussie Real Estate has performed well over that period, so in fact taking that out might actually swing further in favor of PE.

- Agree on the relatively short timeframe, but the issue how much of a company's performance is attributable to the PE Fund verses the new owners etc once you start going to far out. But what the data did show is that backing PE IPO's would have result in a better return for investors - assuming they get out now.

Of course there is the age old question of whether IPOs in general provide good value for investors.

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Scales has done very well - if took your advice would have miss out on the 2nd best IPO from 2014 and one of the best 2015 performers.

Do your research - analysts picked up from the dick smith prospectus that the thing was riddled with fleas.

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Scales shares should have distributed at the start to SCF investors, that deal was pure old boys ticking clipping

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Oh of course it was.

How about Ryman healthcare? That was a PE ipo for like 75 million

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How about Feltex Carpets, that was a PE ipo which collapsed pretty soon after the founders and investment bankers exited the register

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What we can say is that there are good PE backed deals and bad ones for IPO investors. The same applies for non PE backed IPOs. So investors need to be careful with all IPOs / any investment. But Bob your first comment was "never" buy a PE backed IPO and that is obviously not the best advise for investors.

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Walk into the Newmarket store and you know all is not well. Staff numbers are a fraction of what they were a few years ago; range of products have noticeably shrunk, stock levels look partially depleted; store is just a sad shadow of its former self.

You get the feeling that Dick Smith is in the final throes of a death spiral, that it can't pull itself out of.

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It is going to be a very tough year in New Zealand. Expect to see farms being sold and suppliers and retail businesses closing down. More people on the dole and a bigger burden on the welfare system. No winners here.

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I don't think Dick Smith has anything to do with a supposed tough year in NZ coming up - totally unrelated. There are other issues that will come out re DSE - will be interesting what the regulators do - if anything.
I think its going to be a great year in NZ!

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Mark please enlighten us over what parts of the economy you think are going to do well this year. I am involved in retail and it has never been so tough. A major farming transport operator told my administration manager that farming is going to even have a tougher year this year. His business is already seeing it happening. I suppose Auckland house prices will continue to go up. That is good news for the economy.

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TVs are expensive in NZ and Dick Smith with discounting are still overpriced.

It is interesting to see the happy detractors rejoice in their dreams coming true, as an IPO company goes under.

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It's sad that this has happened
But to be honest,
the staff in the stores were not that great at up selling and the customer service was poor.
I would go in and walk out ... Then go to someone else who at least acknowledged you.

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Dick Smith lost my business when they changed what they sell, they used to be electronic enthusiast store but now just general electronics with a high price tag.

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I remember the old electronic kit sets that they used to make, as well as the Dick Smith computer that could play Pacman, great fun when you're a kid! Couldn't find anything like this in the stores over the last two years, only expensive HDMI cables, other accessories that were a waste of money, as well as under spec computers. Why visit?

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I know what happened with Dicky, they wanted to change their business and did not understand their customer and what made the customer come in (look at Jay car, I may think their over priced but they give great service and know their products, so I still buy there)
At dick smith I would go in, find what I wanted (the staff either ignore you or don't know their products), go to the counter - wait (for no service) then leave the item on the counter and go to a shop which allowed me to buy rather than ignore me
the issue wasn't the IPO being from PE it was that the company was badly managed for some time, resulting with staff who did not know their products (Sales101 - know what your selling) or care if the customer was served
Management who didn't know their customer and worst of all store managers who didn't care for the business - I was in noel lemming and they had a person waiting at the counter to buy, so one of the sales staff who was with a customer quickly excused them self to make sure that there was staff to serve at the counter (if only Dick Smith had staff like that)

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I'll be interested to see the outcome of any investigation into how this company was trading, knowingly taking money as deposits and gift cards when in all likelihood the directors knew the value in a few days of said transactions would be worthless as unsecured creditors. Not quite sure how these guys sleep at night - perhaps their directors fees and a few little blue tablets washed down with a wee glass of Dom helps.

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PE firms have only a single purpose and that is to generate as much income for their shareholders as possible, in their world this current fiasco is irrelevant as the IPO generated 520 million at which point they made a swift exit, morals do not even come into the equation and the general public are much the poorer because of it

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How long did the retail chain trade for? that's my question.

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