Is Tony Boyd accusing us of bringing down Dick Smith? I’ve had to slap myself three times but it’s hard to draw any other conclusion from this morning’s private equity puff piece in the Australian Financial Review.
For the record, I think a Senate inquiry is a waste of time and taxpayer money. Even at its over-inflated listing price, this was a $520m company that went bust. In the context of a $1.4 trillion dollar stock market, it is a drop in the ocean. Losing money is part and parcel of investing and the last thing we need is an inquiry and more red tape every time it happens.
But Tony Boyd (Chanticleer in the Fin) seems to think that, if there is someone to blame, the finger should be pointed at us instead of private equity firm Anchorage. Here are the two relevant paragraphs:
“Chanticleer knows that Forager Capital is regarded as the ultimate truth when it comes to the collapse of Dick Smith but it would be a useful exercise for the Senate to call the principals of that firm and ask them about the litany of factual errors in their much heralded report on Dick Smith.
The Senate inquiry also ought to call on Apple which was a major supplier to Dick Smith. The question to ask its management is this: Is it true that Apple management withdraw (sic) its normal trading terms and slashed them to cash on delivery after reading the factually incorrect Forager report?”
Firstly, if you are accusing a firm of “factual errors”, you should at least get the name of said firm correct.
Second, what exactly are these “factual errors”?
I’ve been waiting for a letter from Anchorage since we first published Dick Smith is the Greatest Private Equity Heist of All Time in October last year. Nothing. Of 127 comments on the blog so far, not one highlighted an error. Yet Tony Boyd knows something we don’t. I await further enlightenment.
Finally, and this is perhaps the most extraordinary insinuation made, apparently our blog post was the domino that brought the Dick Smith empire crashing down.
Let me get this right. Matt Ryan, analyst at tiny, irrelevant, mostly unknown funds management company called Forager, writes a blog post showing how private equity made a fortune out of the float of Dick Smith. Someone at US$500bn company Apple reads said blog post and, despite everything else being hunky dory with their important client, decides to “withdraw its normal trading terms”. That, and not the fact that the business was listed with a significant working capital deficit, is what brought Dick Smith to its knees?
I don’t blame Anchorage for Dick Smith’s demise. But, sure as hell, they had a bigger role to play than us.
For the record, we have never had an interest in Dick Smith shares, long or short.
Want to know more about the style of investing we practice at Forager? Check out our page what is value investing
43 thoughts on “Dick Smith’s Demise Nothing to do with Anchorage, Mostly Forager’s Fault”
Just goes to show the demise of quality journalism in this country. As an aside , can you can do a positive write up on some of your tech holdings in the hope that Apple will take note and lob in a massive takeover bid ?
Totally farcical by the AFR. Keep up the good work Steve and team.
Guys, keep doing what you are doing, it’s great insights.
Well said Steve!
Your blog was the first to unravel the shroud on this greedy bunch of so called capital investors.
I’d like to see a report on what Anchorage did to the Golden Circle.
Please keep up your great work team!
As they say, there is no such thing as bad publicity.
The AFR article is a joke, I wonder if they deliberately got the Forager name wrong so it would be harder for people to find the report they refer to?
Keep doing what you do so well. The journo’s have to keep filling up their columns with any sort of nonsense that they can dream up.
So glad I cancelled my AFR subscription recently. That they let so called journalism like that be published under their masthead says enough to me as to their relevance these days.
And like Steve (and probably most) I was waiting, waiting, waiting, for Tony Boyd to highlight at least one or two of these factual errors. Sounds like it was an opinion piece by a drinking buddy apologist of his PE mates.
I suspect the journalist may be a bit defensive since he praised the management and Anchorage in 2013, mentioned in this article.
“the turnaround chairman Phil Cave and chief Nick Abboud have mounted is phenomenal.”
“They are already on track to more than double the earnings before interest and tax from $25 million under the ownership of Woolworths to $50 million under the ownership of Anchorage Capital Partners. It is distinctly possible that the run rate of profits will be closer to $90 million by the time Dick Smith Electronics hits the initial public offering market next year.”
In this crikey article, Adam Schwab is more cynical about the role of Anchorage.
“This led to an almost comical Chanticleer column last week in which Boyd defended the role of private equity in the Dick Smith fiasco, appearing to blame pretty much everyone else for the collapse.”
“Despite Tony Boyd’s claims, like a black widow, Anchorage’s action caused the death of Dick Smith and the corporate raiders collected an almighty inheritance. So yes, there were plenty of culprits in the Dick Smith tragedy — from the board to management to investors to rapacious banks. But it might be time to put a target on Ancorage’s back after all.”
Maybe Chanticleer is a play on words because that AFR ‘article’ is bollocks.
Great Analysis Steve.
Shoot the messenger stuff by the AFR.
Did they benefit by promoting the float?Unethical not to declare this if the AFR did.
Perhaps you could list the journalists and brokerages who were promoting that float?
What were they paid?
Keep up the good work Bristlemouth!
Unbelievable, but believable. You got in early so they think you did it. Am afraid many publications are now into branded content. I guess that means they can’t tell the difference between journalism and publicity. good on you.
GRACoswey (a merger of GRA and Coswey Australia) are registered lobbyists for Anchorage Capital.
Tony Boyd was a director of Cosway from March 2007 – June 2008.
But I’m sure he’s not biased in any way whatsoever.
Too good, thanks John! Biased or not, perhaps this relationship should be part of the Senate Inquiry 🙂
It requires an apology from AFR at least, and a full disclosure of Tony’s interests.
I have requested from Tony Boyd the factual errors he refers to. It seems to be an exercise in blame deflection from Phil Cave and Anchorage. There must be a reason for this?
All publicity is good publicity and if you guys really can take down a listed company with the stroke of a pen hopefully you’ll have new investors lining up to give you their cash. Short fund perhaps?
Tony Boyd’s ‘paranoid piece’ is demonstrative that shock horror, no one reads the AFR for genuine research, or insight anymore. You have to be kidding. Forager among many are picking up the pieces on a broken publishing model where quality journalism (case in point Mr Boyd’s piece) doesn’t happen anymore. Boyd’s article was just lazy writing. Tony Boyd – 0, Forager 1.
I think the thrust of the original Forager Funds Management article was correct in that Dick Smith Holdings was likely listed with insufficient working capital (rough calculations show $2k of net working capital (debtors + inventory – creditors) being on hand for each store open at December 2013 less than a month after listing) requiring investment from future free cash flow to plug. However it is unlikely this was the sole cause of failure. It is likely poor inventory purchasing decisions in 2015 combined with excessive use of debt during 1H16 precipitated the collapse.
Maybe there is a need for prospectuses to be improved so that they disclose more working capital, balance sheet and cash flow information than they do now (as it would have more easily shown the depleted working capital position on listing) particularly given the highly cyclical nature of the Dick Smith business (as seen on page 65 of the (replacement) prospectus of 21 November 2013). Such information would have been deemed relevant for an incoming purchaser in a trade sale (and no doubt was relevant to Anchorage when it conducted its due diligence in 2012 in deciding to acquire Dick Smith Electronics).
It is also interesting in recent commentary that no one seems to have made mention of the apparent discrepancy between Anchorage’s assertions that it was not able to provide historical cash flow information for Dick Smith (page 61 of the prospectus) and Woolworths providing operating and investing cash flow information for the Dick Smith Electronics business in its 2012 annual report (page 174). Is it possible that such information genuinely could not be provided or was the fact that historical financing cash flows couldn’t be provided by Woolworths for FY11 and FY12 (given the central treasury function operated by Woolworths made such disclosures impossible for Dick Smith Electronics) a convenience which allowed disclosure of the significant cash release from working capital by Anchorage during FY13 not to be made (as seen in the cash flow reconciliation note to the 2014 Dick Smith Holdings annual report, page 74) and possibly uncomfortable questions about the adequacy of working capital likely to be held by Dick Smith Holdings on listing not to be raised?
Possibly the accusation in the AFR article is that the original Forager article implied Anchorage ‘had to mark-down the assets of the business as much as possible as part of the acquisition’. The original Forager article made specific mention of the fair values ascribed to inventory ($312m) and plant and equipment ($65m) by Anchorage in comparison to their book values ($371m inventory and $119m plant and equipment) as evidence of this.
The ‘book value’ might be referring to original cost or possibly written down value – this isn’t made clear in the accounts. Possibly a more relevant comparison to determine if these asset values were subject to ‘mark down’ is to compare the fair values ascribed by Anchorage to those assets to the values ascribed to those same assets by Woolworths at the same time.
Reviewing the Woolworths disclosures of the sale (page 216 of the 2013 annual report) shows inventories valued at $246m (versus $312m by Anchorage) and plant and equipment at $51m (versus $65m by Anchorage). On this comparison the relevant asset values were not written down on a net basis, but rather revalued upwards.
Such an analysis was also contained in a Fairfax article by Mr Michael West and Mr Jeffrey Knapp last week (though their assertion that this upwards valuation likely meant these assets were overvalued – and such overvaluations were perpetuated for another 3 years and appears to be the predominant reason for Dick Smith Holdings’s collapse also seems unlikely).
Arguably the values carried by Woolworths were conservative or ‘pessimistic’ assumptions on the likely basis that they didn’t want to incur further asset impairments at a later date if the sale process took longer than expected to finalise (borrowing from the old banking adage ‘first lost is best loss’). Did this conservative provisioning ($420m in January 2012) have undue influence in negotiations with Anchorage during 2012 and Woolworths perceptions of the business’s value when selling Dick Smith Electronics? Possibly.
Another comment in the AFR article is whether or not Dick Smith Electronics was carrying excess inventory levels. Page 66 of the prospectus is telling. Woolworths appears to have closed 73 stores between July 2011 and 26 November 2012 (the date of the acquisition by Anchorage) with a net closure of c.23 stores between July 2012 and 26 November 2012. Did such closures lead to excessive levels of inventory being on hand when Anchorage acquired the business on 26 November 2012? Was Woolworths reasonably reimbursed through the working capital mechanism in the sale and purchase agreement for this excess working capital provided to Anchorage ($21.2m according to the DSH 2014 annual report, p80)? It is difficult to draw a conclusion on this based on the information publicly available. Did Woolworths leave so much value on the table in terms of excess inventory that it easily allowed Dick Smith Electronics to buy itself from Woolworths and should Woolworths shareholders ask questions about the competence of Woolworths’s negotiating skills in this sale? Possibly.
Further in the article it is implied that the potential deficiency in net working capital ‘came home to roost’ in 2015. Whilst this is one possible explanation for Dick Smith Holdings’s collapse it is not the only one. It is also arguable that decisions taken by Dick Smith Holdings management in 2015 to ‘opportunistically’ acquire inventory earlier in the retail cycle to improve GM% and take advantage of favourable FX rates (paraphrasing the Chairman in his address to the 2015 AGM in October 2015) as well as increasingly seeking to sell private label inventory was not a sensible one in an industry known to suffer from high levels of technological and fashionable obsolescence and potentially gave Dick Smith Holdings less flexibility to acquire inventory closer to Christmas when assessment of consumer demands could be made with greater certainty. There is also evidence in relevant trade article coverage (see smartoffice.com.au) that Dick Smith Holdings may have been placing significant pressure on distributors to make greater contributions to promotional and advertising costs as well as suppliers tightening up trade terms (as some articles indicate some trade credit insurers might have stop providing insurance of debtors relating to Dick Smith Holdings) and ceasing supply.
There is also a question of the comments in the blog post by Forager Funds Management staff indicating that it might not have been possible for investors to understand how Anchorage had ‘raided the balance sheet’ because the prospectus only provided a balance sheet at June 2013 (which incidentally is all that is currently required in a prospectus under ASIC regulatory guidance 228 (effective disclosure for retail investors)) and such insights in the original Forager Funds Management blog post could not be visible to incoming investors until after listing and the release of the 2014 audited accounts. It should be noted that the Dick Smith Sub-Holdings Pty Ltd (who housed the Dick Smith Electronics business for Anchorage until the listing) 2013 annual report contained essentially the same notes to the financial accounts as those relied on from the 2014 annual report of Dick Smith Holdings. The 2013 accounts were lodged with ASIC and available for download on 31 October 2013 (the last date the 30 June 2013 accounts could be lodged on an ‘on time’ basis) for those investors aware of disclosing entity reporting obligations under Chapter 2M of the Corporations Act. This was three weeks before the replacement prospectus was lodged with ASIC and uploaded to the ASX announcements page. If Anchorage had not lodged such accounts until after the listing of Dick Smith Holdings then there would rightly be questions about Anchorage trying to potentially hide relevant information from incoming shareholders. In any respect these accounts were lodged on the ASX on 4 December 2013 when Dick Smith Holdings commenced quotation. Arguably there is a case for ASX Listing Rules to be amended such that it requires entities seeking to be listed to make such audited financial accounts (relied on for pro-forma and statutory historical information in the prospectus) freely available to investors by uploading them to the ASX announcement’s page under the listing company’s proposed ticker code at the same time the prospectus is lodged. This would ensure such information is available for all potential shareholders and not only those with esoteric knowledge of Chapter 2M reporting requirements for disclosing entities and allow incoming investors to make informed decisions about the appropriateness of management’s pro-forma adjustments outside of the reliance on the Investigating Accountant’s report.
I think both the AFR article and the Forager Funds Management blog posts raise interesting and relevant matters which will hopefully be examined thoroughly by the Senate inquiry, ASIC and by the Dick Smith Holdings Administrators in their 439A report to creditors. If there are effective regulatory changes that can be made to minimise the chances of a similar corporate collapse in the future they should be properly investigated and implemented.
The news is like sausage; the less you know about how it is made, the better for your appetite.
I try to minimise my consumption of journalism because the only real difference between journalism and other forms of entertainment is that with journalism there is an element of self-delusion; both on the part of the entertainers and the audience.
Press articles are useful for obtaining the key aspects of a story that help circulation figures after it has been pre-digested by journalists and their editors. But when it comes to obtaining an edge on the market, nothing beats raw, undigested data.
If I really feel I need a second opinion, then the blogosphere can often offer much better commentary than the press.
If I want to be entertained, I’ll watch a movie.
Boyd’s AFR article on 9 Feb and his previous writing on this matter (6 Jan16 and 1 Dec15) are shocking! They are mainly rants with few logical arguments or anchoring facts. (Example from 6 Jan16: “Chanticleer has observed lots of people allowing the bile to rise to the back of their throats before screaming about the evil, unethical and immoral private equity managers.” Are the AFR editors asleep at the wheel in letting this stuff bring down an otherwise very good publication?
Essentially, Boyd points to DSE’s board and management as the source of its demise, while doubting (or sometimes almost rigorously denying) that Anchorage has any responsibility. Boyd main provides one inference and one fact throughout his three articles. The inference is that Anchorage’s actions leading up to the IPO couldn’t possibly affect DSE’s demise 24 months later. He infers that the causal link would be too weak. The main fact Boyd relies on is that DSE “performed fine in its first year as a public company.”
Both the inference and fact are badly flawed. Boyd doesn’t consider the possibility that if inventory was massively sold down and cash skimmed off (not certain, but a known PE practice before IPOs), DSE needed to build up sufficient inventory quickly by acquiring debt. Boyd provides no evidence that debt was acquired only or mostly in the second year. And isn’t there some evidence that Anchorage began the expansion momentum? Boyd’s rants imply that Anchorage didn’t do so, or that DSE’s board should have stopped the costly expansion the day after Anchorage left the building.
The truth, I suspect, is that DSE’s demise is caused by several factors, including Anchorage’s pre-IPO actions (suggested by Forager), DSE’s board and management decisions post-IPO, and DSE’s historical brand image (mainly no-name products with not-sufficiently-competitive pricing for brands).
It would be a useful exercise for Tony Boyd to list and debate Forager on Livewire about the so called “litany of factual errors” in their Dick Smith report.
All very interesting but I think there is a definite distinction between losing money and going bust!
Interesting articles and comments.
Are some of the comments in the Forager article on Dick Smith in October 2015 subject to confirmation bias and overconfidence when viewed after reading the September 2013 blog post before any financial information was available?
Meh! Either sue Tony Boyd or write another article. I’ve battled him on twitter before he normally folds like a pack of cards. Your report was good but I assume you only had access to public info when you wrote it.
Anchorage adviser and new RBA board member is Allan Moss.
Allan Moss is ex Macquarie CEO.
Macquarie lent DSE $30m unsecured.
Will Dastayari call a sitting RBA board member to testify?
You should be careful what you write when it published for all the world to see – particularly if the director you have personally referred to in your post considers your description of their abilities as defamatory…
Ben thanks for your concern about Robin’s post being potentially “defamatory”. Just to be transparent, you or your firm aren’t receiving paid (or other) benefit from Anchorage or PE more generally are you?
No (accidentally posted this as a new comment before when should have been direct reply to your post)
I was expressing a personal view, and never intended to imply my view is anything other than that.
People will have their own experiences, of which some will differ from mine; some significantly.
Whilst you are entitled to your opinion I am just saying it might not be the best idea to go publishing those thoughts, in the way you have, on a public blog. I don’t think saying they are your personal views is a cure to fix any possible defamation from the original post.
It is a matter for you but maybe a better idea is to ask Forager to delete your original post?
Steve – looks like Tony answered the call…
Thanks Cassie. A bit rough dragging the “anonymous supporters” into the mud. Do I need to respond? I would seem to me people can read both pieces and make up their own minds.
Tony Boyd has given a point by point response.
You have 2 options: you can do a rebuttal (and then leave it there). Or stop now.
The trouble with stopping now is that it’s reach the point of “he said / she said” and everyone is in a huff pointing fingers at each other.
I think a tediously long (and carefully considered) rebuttal would be worthwhile seeing. I also recognise that it would be something that would take days to write properly and get completely squeaky clean – is the time spent worth the return? For peace of mind – yes – but in terms of finding a hot new thing to invest in, I’m not so sure.
Should you replay? No. The conversation is getting petty. Boyd’s attempt at throwing mud at Forager suggests a small mind at work. Leave it alone.
I think you are right about the anonymous supporters comment. The International Fund reference was a low blow.
Where there are factual errors or calculation errors you should make a correcting footnote to the original article. Wally suggested a blog rebuttal but is up to you how much time your staff want to spend blogging versus doing their full time jobs.
What’s interesting in Tony’s Tuesday article is the comment about Apple. Tony wouldn’t have published that comment if he wasn’t able to back it up. If Dick Smith goes into liquidation, the liquidators decide to pursue Apple for an unfair preference payment and if it goes to court Apple’s defence relies on your Oct-15 blog post what then? Is there a claim against your fund if the blog post was inaccurate? Seems remote but would be interesting if it tested whether or not you can rely on a general disclaimer that required someone to scroll past over 100 blog comments at the end of the article to read.
Analysts and fund managers look at the public record (accounts, prospectus, etc) all the time, and publish opinions about public companies.
Provided people are treated carefully, there is no such thing as defamation against a company (calling directors various unpleasant things is the place to tread carefully).
Provided the assertions of the published articles have a basis in the public information, I don’t see any difference here to any other publication by an analyst. I also don’t expect Forager to have made huge blunders.
There is clearly a difference of opinions going on and it would be nice to see some reconciling of one against the other. Mind you many financial accounts are presented in such a way that finding what the real state is can be difficult, and finding a behaviour over time even more so.
Finally – the company failed some 12+ months after its sale by PE. The blog posts were about the PE behaviour, and pointing out that behaviour seems entirely reasonable to me.
Whether that behaviour resulted in the subsequent failure (set up to fail), or whether it was the management (misjudged / mistakes) is entirely subjective – something where I think we’ll never know the answer. To assert that the Forager *reports* about the PE behaviour have led to the failure seems a pretty long bow to me.
Reading what Cassie said I don’t think she was implying damages through defamation but reliance on information in a blog post which might have been inaccurate and whether you could rely on a general disclaimer which you could only be seen if you scrolled past all the comments at the end of the article and get to the bottom of the web page.
As she said I think such a claim would be a very remote chance of getting up (if at all).
Check out p.20 in the SMH today.
Wonder if Tony Boyd will have a peek.
Caves Anchorage have just lost a court case where the judge (Justice Perram) in his judgement ‘included some rather unfavourable assessments of the testimony from Cave’s Anchorage boys’. He concluded they
a. ‘had given knowingly false evidence’,
b. attempted ‘to have the court conclude something which their senior executives knew was not the case’,
c. ‘this was sought to be achieved by the giving of evidence which was false and by the instruction of attorneys to pursue a case before the court which must have been known not to be correct’.
I guess people can draw their own conclusions.
Not very flattering of Caves Anchorage executive. I wonder which executives the judge was talking about. I might just have to dig out the case and see exactly who they were.
I had a quick look at the case involving Anchorage Capital Partners over lunch. It was a trade mark dispute over the use of the name anchorage. They lost by the way.
The three Anchorage staff referred to in the judgement were:
Michael Briggs (was Managing Director of Anchorage, he retired around May 2014, he was one of the directors of Dick Smith Sub-holdings Pty Ltd)
Phil Cave (current Managing Director of Anchorage, he was Chairman of both Dick Smith Sub-holdings Pty Ltd, and Dick Smith Holdings Ltd)
Fiona Scarf (Office Manager of Anchorage)
I shall leave you to read what the judge (Justice Perram from the Federal Court of Australia) said of these three witnesses in their evidence. The reference for the relevant judgement is Anchorage Capital Partners Pty Ltd v ACPA Pty Ltd (2015) FCA 882.
If you don’t wish to read the whole thing have a squiz at paragraphs 25, 26, 27 and 53.
You don’t need to have any sensational media headlines. Just have a read for yourself, this is straight ‘from the horses mouth’ (so to speak).
Oh dear oh dear, you naughty Forager boys. When will you little kids stop going around and beating up the neighbourhood gorillas? You really are very naughty, you do know that the neighbourhood gorillas are just terrribly, terribly misunderstood.
Why, I bumped into the gorillas mother in the shops the other day – such a sweet lady – and she was quite insistent that the gorillas a very upset by you boys, so so upset they have gone to their rooms to sulk. She’s quite annoyed with you, and things you should go apologise. After all the gorillas are so so misunderstood. You are just being bullies, and you know thats not nice.
So go on… go apologise now. Mrs Gorilla is expected you!
If you think the Forager report on Dick Smith was a bit tough, you guys should go read what John Hempton has been writing over at Bronte Capital. He’s had a US pharma company in his sights for about the last 12 months, and he’s got far more than a double barrell shot gun firing away. He’s doing financial analysis, picking apart the management briefing phone calls, digging through filings and records, and plain old calling people liars. There are no holds barred there.
Forager – you people are bunch of gentlemen by comparison (and please keep it that way).
I read the article in the AFR newspaper at my local library.
Tony Boyd virtually accused you of incompetence, because your 12 month performance did not beat your benchmark.
Who bloody cares about such short term performances? It’s such short term thinking that causes the majority of fund mangers to under-perform in this country.
My challenge to Tony Boyd is to come back after 10 years and then make the comparison.
I bet he doesn’t.
Unlike most investors, the type of investor in these funds think long term, not short-term like one or two years , but eight years, ten years and beyond; in other words an economic cycle.
Tony, If one or two years performance bothers you, then put your money in term deposits.