Expressions of interest or mere tyrekickers?

Dick SmithThere is no shortage of tyrekickers lurking when a company collapses, although receivers and managers like to call them ‘interested parties’.

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The financial data of a collapsed company can be particularly useful to a rival company and is well worth the investment in lodging an expression of interest.

The enthusiasm of receivers and managers for the number of expressions of interest lodged for a business always needs to be tempered by the fact that most interested parties have no plans to bid for the failed entity but are keen to pick over the entrails.

Dick Smith shareholders and unsecured creditors face a wipe-out on their shares with the sale of parts of the business unlikely to realise enough funds to pay the secured creditors.

Staff of the retailer will no doubt rely on the Federal Government’s Fair Entitlements Guarantee (FEG) scheme for payment of some outstanding entitlements.

Any sale of Dick Smith Holdings and related entities will not realise anywhere near the $390 million of debt the retailer has run up since it was acquired debt free from Woolworths in 2012.

In reality, it is unlikely that the receiver managers will realise the $140 million owed to secured creditors through any asset sale.

Ferrier Hodgson was keen to announce in early January that they had received more than 40 expressions of interest for the collapsed Dick Smith business, but already most of the interested parties have vanished and the administrators are restructuring the business.

Staff in stores are telling customers they don’t know what will happen to Dick Smith, but they are expecting store closures rather than a white knight new owner, a view that is strengthened by depleted stock levels.

No binding expressions of interest have been received by Ferrier Hodgson and the process of realising any return from the business is being eroded by continuing revelations of problems in the business.

Ferrier Hodgson has revealed this month that around 3200 employees have been underpaid at least $2 million, with the payroll problem potentially dating back to Woolworths ownership in 2012.

The underpayment of employees was discovered last October when Dick Smith announced write-downs on its inventory and launched a pre-Christmas discount sale to generate cash flow.

At the time, suppliers were tightening their trading terms as concerns grew around the retailer’s financial position and insurers downgraded cover on stock transactions, prompting some suppliers to demand cash settlement for goods supplied.

As Inside Retail Weekly reported when Dick Smith appointed McGrath Nicol as administrators and Ferrier Hodgson as receiver managers, the retailer has also lost its 27 concession stores in David Jones department stores, which were not huge sales generators but are understood to have provided healthy margins on higher end merchandise.

Ferrier Hodgson terminated the agreement in January after its initial review of the business, resulting in the redundancy of 181 employees.

Ferrier Hodgson has now also cut 22 support office jobs at Dick Smith’s Chullora office in western Sydney as part of a restructure of the business.

Included in the departures was Michael Potts, who joined Dick Smith as CFO in September 2013 and, along with former CEO, Nick Abboud, faces a grilling about the financial reporting of the retailer by the Australian Securities and Investments Commission in the months ahead.

Restructuring for a sale
Ferrier Hodgson has appointed former Dymocks CEO, Don Glover, as CEO to assist in restructuring Dick Smith and in pursuing a trade sale of parts, if not all, of the business.

Former Woolworths and Metro Cash and Carry (now Metcash) executive, Bert van der Velde, has been appointed as interim CFO to replace Potts and to assist Glover.

The sale prospects for Dick Smith are brightest for the retailer’s website, albeit the purchaser would want to have the brand rights, a requirement that would only seem possible if none of the 393 stores were sold.

It is understood there is some genuine interest in the New Zealand store network and some enthusiasm for the fledgling Move chain of fashion technology stores aimed principally at a female demographic.

There is also unconfirmed speculation that the Indian powerhouse, Tata, which was a joint venture partner with Woolworths in a Dick Smith spin-off in India branded as Croma, has indicated an interest in the business if it can secure a bargain price entry to the Australian market.

Inside Retail Weekly expects Ferrier Hodgson to start culling unprofitable stores following the support office restructure and based on discussions with a handful of interested parties.

While the sale process proceeds, Ferrier Hodgson is also continuing to investigate the financial accounts of the retailer with a view to pinpointing the reasons for the collapse and whether or not it traded while insolvent in 2015.

ASIC expects a report from the receiver managers in mid-2016 but is understood to already be examining the prospectus that private equity firm, Anchorage Capital Partners, produced for the 2013 float of the business on the Australian Stock Exchange.

For an outlay of just $10 million of its own funds, Anchorage Capital Partners realised $520 million from the public listing of Dick Smith after just 13 months ownership.

Woolworths shareholders had restructured the Dick Smith business and taken $420 million in writedowns on its own accounts prior to the sale to Anchorage Capital Partners in 2012 for between $94 million and $115 million, an amount to be clarified by Ferrier Hodgson’s investigations.

The private equity firm acquired the business with no debt and net tangible assets of around $290 million. but offloaded it on investors in the float in an apparently much less healthy financial state.

Anchorage Capital Partners claims the business was sound and its prospectus was a fair representation of the company’s business in 2013 and its performance targets going forward, but the firm will face scrutiny from ASIC and is also expected to be called before a Senate Inquiry.

ASIC is also certain to seek a please explain from Dick Smith auditors, Deloitte, who signed off on the retailer’s 2015 financial year accounts, as well as from Abboud and Potts who were remarkably bullish about the prospects of the retailer weeks before the company revealed its financial problems.

More retailers in administration
While the Dick Smith collapse has garnered the headlines, two other chains are currently in the hands of administrators, My Baby Warehouse and Laura Ashley.

My Baby Warehouse NSW closed 11 stores in December with administrators, Cor Cordis, finding there was no option but to cease trading with no prospect of a sale of the business.

Cor Cordis was appointed to BHLS and Baby Zone, which traded under the brand ‘My Baby Warehouse’, selling a range of baby products, much of it apparently on a consignment basis.

ASIC seems certain to also take a keen interest in the collapse of the My Baby Warehouse chain, as its owner was Ajay Arora, a businessman linked to other failed businesses including 19 IGA supermarkets.

Arora lost a Supreme Court case against grocery wholesaler, Metcash, in which he was seeking millions of dollars in damages while owing $14 million in unpaid rent and grocery supplies.

The court decision on his supermarkets business was handed down in November last year, weeks before the appointment of Cor Cordis to the My Baby Warehouse chain.

Suppliers have claimed they were not paid by My Baby Warehouse and Arora has been accused of not meeting required reporting standards in his businesses, claims that led to an Australian Tax Office audit.

Staff of the chain are understood to be owed more than $1 million in superannuation and entitlements and will rely on the Federal Government fund for the shortfall on employee funds.

In another January retail collapse, the classic Laura Ashley chain appointed FTI Consulting as administrators.

Laura Ashley in Australia and New Zealand is run under a licence agreement with Laura Ashley UK and the sole director of the business is Daryl Chait.

Laura Ashley has 38 stores in Australia generating annual sales of around $42 million.

Four stores in NZ are not involved in the administration.

FTI Consulting has advertised the business for sale while it undertakes a store by store review of trading.

The Laura Ashley brand launched in Australia in 1971 and was acquired by Chait in 2007. Chait invested in rebuilding and expanding the business in line with changes in the UK parent company designed to refresh the brand and rebuild sales and earnings.

While Chait launched a 750 square metre flagship store as part of a store upgrade program, the brand struggled for sales against new international competitors and local rivals, in part, because designs failed to lure customers.

Laura Ashley was discounting stock heavily in stores and online before Christmas in a bid to generate cash flow, but was forced to call in the administrators in the first week of January.

Chait is also connected with another fashion chain collapse as the sole director of Parque, which he traded as the FAT independent fashion chain.

FAT was put into administration in February 2015 with debts of around $4 million.

FTI Consulting has made the familiar statement that there are a number of interested parties in the Laura Ashley business but it is yet to be determined whether they are serious suitors or more tyrekickers.

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