“How did you go bankrupt?”
“Two ways. Gradually, then suddenly.”
Ernest Hemmingway – The Sun Also Rises
It’s true. When it happens, it happens quickly. Even we, however, are shocked at the rapidity of electronics retailer Dick Smith’s demise. The company reported a profit of $38m for the year to 28 June 15 and forecast something similar for the following year. Its directors even declared a dividend of 5 cents per share – almost $11m in total – and paid it to shareholders on the 30th of September last year. Three months later it files for receivership?
As Matt presciently pointed out in Dick Smith is the Greatest Private Equity Heist of All Time, the company’s working capital deficit on listing left it in a precarious position. Despite the supposed profits, free cash flow last financial year was negative $35m. That would undoubtedly be making banks and suppliers nervous. We’ve been hearing rumours for the past few months about the latter refusing to supply inventory unless they get paid upfront. No inventory equals no sales and no sales equals no profit.
If I had to hazard a guess as to why the banks pulled the pin so quickly, however, it’s probably because there is no better time to do so. There’s no doubt they would have hoped that the Christmas sales went well and that Dick Smith could profitably trade its way out of trouble. But, absent that scenario, the banks would want to preserve their position in any restructuring or liquidation.
Think about what a retailer’s balance sheet looks like just after the Boxing Day sales. Christmas gift cards have been sold but mostly not yet redeemed (I didn’t notice it myself but Twitterati are suggesting the company pushed its gift cards hard through Coles in December, offering up 10% bonuses on the cards in order to ship them out the door). Inventory has been sold but not yet paid for. So cash is at its high point.
It seems counter-intuitive that a retailer could file for receivership at the high cash point of the year. But, if you are the bank and you have the ability to force the situation, there is no better time. Stop the clock today and the cash will end up in the banks’ coffers. Wait another few weeks and a large chunk of it will be paid out to unsecured suppliers instead.
Christmas trading must have been woeful. But banks jockeying for position is likely a better explanation for the timing of Dick Smith’s demise.
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25 thoughts on “Why Banks Pulled the Pin on Dick Smith”
I’ve only just discovered this blog, and have followed your stories on Dick Smith with amazement. Disturbing how mum & dad investors were taken for a ride with the original share float, and now I’m reading that the public are taken for another ride, with gift vouchers! Why is it always the general public that are the real victims, and not the financial institutions involved. Really this whole Capitalist, money over people, is really bad news! On a side note, our prime minister John Key comes from a private equity background, and it does worry me where his priorities lie!
Really? …you bought John Key into this discussion..? You’re a socialist fool my friend…and it was FOREX not PE that he was involved with. Keep on investing in buy-out sponsored IPOs Peter, you obviously know what you are doing.
Well done Southern Isle, so you’re only bothering to respond to the last line of my comment, and you’ve decided I’m a socialist? Guess that makes you the expert?
Southern Isle and yourself display the same sloppy use of terminology. If you honstly think capitalism means “money before people”, then perhaps it would be best to leave commentary on such matters to those who have even the most rudimentary education in economics.
Jason, so you think it’s OK for any financial institution to protect yhemselves over others? What happened to social responsibility? All I did was question their ethcs. I trust you think it is fair to push the sale of gift vouchers to get money in the bank by Dick Smith, and then for a secured creditor to take advantage of that by timing receivership so that the Dick Smith customers can’t redeem their vouchers. Some people will have worked hard on minimum wage to give these vouchers as presents.
Why don’t you think I have the right to comment on this post? Just because my opinion differs from yours, doesn’t make it any less valid.
Plus you know nothing about me, so who are you to draw any conclusions abput my education?
I agree Southern Isle – Peter, after an ideological burp, had a grubby ill-informed crack at Key for good measure.
Peter – you appear to have no confidence in Capitalism… yet you appear to trust, Forager, a player in the market? The market is a reflection of human behaviour, there are shysters and there are those with credibility. That’s why due diligence and integrity are so important.
Shysters get found out, undoubtedly this has done massive damage to Anchorage who will have issues getting another IPO away now – i.e. the market self-regulating.
Thanks Steve for your great articles, well researched and only adding to your reputation!
These guys know their stuff, imho (I’m a long time member of forager and intelligent investor). Their best ability is avoiding shockers (like Dick Smith) and owning their mistakes. Be interested to see if legal action occurs, similar to BBG.
I concur with Peter’s comments above – great insight provided by these articles. I’m just scratching my head about NAB’s credit assessment – how could they approve $135M in June last year using the same numbers & information available ??!!
I’m amazed that Anchorage Capital have been allowed to get away with this. A similar situation is the Myer float a few years ago where gullible retail investors are sold a pup and the management of private equity walk away with hundreds of percent in contrived returns. All potential investors in IPOs need to think seriously about the incentives of the vendor and ask themselves why the vendors are selling. If it’s for any reason other than growing and investing in the business, in the majority, then all investors should steer clear.
No doubt, in the years ahead, there will be another high-profile IPO offered by Private Equity and the same retail lambs will walk to their financial slaughter. Lessons learnt from the Myer float in avoiding overpriced poor-quality IPOs? Apparently not.
Steve, are there any grounds for an ASIC investigation (assuming they’re even bothered and have the resources)? By the way, I’ve avoided both this and Myer so I’m not affected in any way but am genuinely concerned for those that are.
Take a look at where the big boys at dse worked before anchorage took over from woolies. … might find one or two of them have a background at myer
Such a simple yet crucial highlight made in the article above where you point out that accounting profits are reported against negative free cash flow. It never ceases to amaze me how this is routinely overlooked or talked down. Surely a basic tenement to successful investing is always to reconcile the Profit & Loss against the Cash Flow Statement- and be able to account for any discrepancies. If only investors would take the time & effort to complete such exercises, many investment disasters would be avoided. Time and again small investors (and surprisingly, large ‘informed’ investors that frankly should know better) get hit badly & I think perhaps a deficit in basic financial literacy is where many small investors get burnt in not understanding a company’s true financial position. Many simple checks & balances can often warn of potential problems & give cause to consider risk against reward. That said, occasional unforeseen circumstances can blow up virtually any investment.
Superficial attractants such as a low P/E ratio & a high dividend payout ratio to the exclusion of everything else are like a ‘bee to honey’ scenario for many people- until deficiencies that were always there eventually come home to roost.
This has been a fascinating scenario & story to follow & I’ve enjoyed the insightful way you have covered it. I really hope it gives cause for people, especially small investors to take note & learn from it & not repeat the same mistake in their future investment decisions.
Many thanks to you and your analysts.
Would love to see a full list of institutional investors that owned this stock at any stage. Will really help me know which super and managed funds to avoid in the future!
You can always trawl through the “Substantial Holder” announcements under “DSH” on the ASX.
From what I’ve gathered from a cursory look is Perpetual, FIL, Paradise and Ausbil were holders of over 5% respectively at the beginning – these are professional investors so they weren’t all mums and dads being duped.
CBA and NAB were too but through their funds management businesses Colonial and MLC mostly and even then these could have been mandated holdings (eg. index replication for SMA, IMA, etc.) so they were perhaps forced to own DSH.
It also looks like MTAA Super, Care Super and United Super were holders and lent stock to UBS and Deutsche (possibly for shorting?).
It was the nominee accounts that got me frustrated when I was looking at it. Both trying to join the dots and also the personal hatred of substantial shareholders being able to hide behind those. One of the nominees was the CEO’s own investing vehicle!
Gotta feel a bit sorry for Nick Abboud (CEO of Dick Smith). He bought ~ $200K of DSH on 28/08/2015 (hopefully not using the equity in his home). This is in addition to the 15,472,639 DSH shares he already owned (valued at ~ $34 Million). Corporate disclosures showed he held this till the end.
“using the equity in his home”? Not a chance! $200K to a man with salary in $million plus range would mean no more than $200 worth of Dick Smith gift voucher to an ordinary family. Besides, the share purchase appeared to be more “political” rather than making good investment sense.
Not only the Funds that invested in Dick Smith need identifying, the Fund Managers need naming as well. This action would be a wonderful to all small investors. Can anyone please assist?
Just to further flesh out the lovely people at Anchorage Capital Partners behind this debacle, they include the new Reserve Bank board member Alan Moss (formerly Macquarie Bank CEO).
Nice one Alan.
Well done guys. I imagine the application forms have been flooding in with all this new publicity. Please invest wisely, no Dick Smiths please! 🙂
Putting aside the financial shenanigans for a sec my personal observation is that Dick Smith failure was a failure of marketing. I remember going to Dick Smith in the 90s as the destination for electrical kits and gear etc and the “appliance” sales seemed to be a secondary element. This was the niche that Dick Smith occupied at least in my mind. It seems at some point they gave that up (Jaycar seems to be the place for that now) and chose to more directly compete with Harvey Norman and others.
Yes I agree with Eyad. Dick Smith was an early importer from Asia of electronic gadgets and video surveillance. Ironically now days he is a bit big supporter of buy Australian..The early Dick Smith shops were a bit of a copy of Radio Shack in America (Tandy here in Australia).
Eyad is right about Jaycar as well as they and their sister company Electus Distribution – they sell same items as Jaycar but wholesale – all those gadgets and video surveillance systems.
What the private equity guys did was capitalize on a well known Australian retail icon and with clever accounting and then an IPO pull off a highly profitable transaction.
Investors in this particular private equity firm would be laughing all the way to the bank with the fees they would pay of 2% of their investment and 20% of the profit.
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Was it not the Directors of the company who appointed an administrator that triggers the banks to appoint a receiver. Aussie Directors liabilities for insolvent trading are pretty tough so they tend to appoint earlier rater than later. Don’t know about this case though.
That said putting gift card funds in trust is probably the right thing to do. There are some variations elsewhere in the world. Look at how India regulations require Amazon to keep customer cash separately until goods are dispatched and cash regulations for all the new wallet companies being launched.