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

Retail chain generated huge profits ... for some.

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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