Anchorage speaks out on Dick Smith investment

Having bought Dick Smith from Woolworths in 2012 for A$20 million ($14 million), plus a share of any upside resulting from an exit, Anchorage took Dick Smith public in late 2013. Just over a year after the PE firm sold the last of its shares, having generated estimated total proceeds of A$450 million, Dick Smith entered receivership.

Responding to accusations that Anchorage dressed up the business for the IPO at the expense of long-term sustainability, Phil Cave, managing partner at the firm, told The Australian that Dick Smith was healthy and had strong growth opportunities. "Every single one of our stores were profitable, there were no loss-making stores, so was it a sustainable model? Absolutely," he said.

Cave noted that it was up to the administrators to determine why Dick Smith collapsed, but he questioned the board's decision to write down stock by A$60 million. That, plus a downgrade in Dick Smith's projected profit in October and poor sales over Christmas, led banks to pull support for the company.

The speed of the move from distressed asset to a valuation on listing of A$520.3 million to receivership has drawn scrutiny. Dick Smith's founder - who sold the business to Woolworths in 1982 - has blamed Anchorage for the demise of the business and politicians are calling for an independent inquiry into the GP's behavior.

Net profit at Dick Smith had slipped from A$13.2 million in 2012 to A$6.7 million in 2013, with EBITDA falling from A$32.6 million to A$23.4 million, and sales declining from A$1.37 billion to A$1.28 billion. In 2014, net profit rebounded to A$42.1 million, with EBITDA reaching A$74.4 million and sales coming to A$1.22 billion.

Anchorage offers a turnaround story on its website but Forager Funds Management claims that the GP marked down the assets as much as possible as part of the acquisition and substantially reduced inventory so that cash flow and earnings were artificially inflated. Two years later, new inventory had been purchased, cash flow turned negative, more debt was taken on, accounting provisions were tapering off, and financial performance suffered.

Anchorage countered that clearing old stock did not leave Dick Smith requiring further debt to acquire new inventory. The company's cash and short-term receivables stood at A$90 million and A$95 million in December 2013 and December 2014, respectively, and remained debt-free. A spokesperson told the Australian this could only have been the case if Dick Smith was turning over stock regularly.

The spokesperson added that the inventory build-up at the end of 2015 reflected growth in store numbers and a change in strategy, as Dick Smith targeted higher-margin products.

Anchorage has not disputed Forager's claim that an additional payment made to Woolworths - it sold part of its right to the IPO proceeds for A$74 million and received about A$20 million from the offering - came from Dick Smith's balance sheet.

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• Topics
• Consumer
• Performance
• Australasia
• IPO
• Regulation
• regulation
• Anchorage Capital Partners
• Australia
• Consumer
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• Exit
• Performance