Posted on 27/03/2015 at 5:08 am
By Paul Marshall
The only limits to the possibilities in your life tomorrow are the buts you use today.
Les Brown
Many would have now heard about the once booming National electronics business Dick Smith going into administration. Some were shocked to hear the news whilst others were not sure what had just happened.
How could a Company doing so well with an effective National distributorship, no past major credit defaults, and 3,300 employees just suddenly go into administration leaving suppliers, creditors, customers, shareholders and employees wondering what had just happened.
Let’s take a quick look at some key chain of events:
- During 2012 private equity group Anchorage Capital (AC) complete a purchase of Dick Smith for $115 million from Woolworths Australia.
- AC down lays down $20 million in cash deposit with the balance plus interest to follow.
- Dick Smith has cash reserves of around $12.6 million so AC has effectively paid only $7.4 million.
- On 26 November 2012, Dick Smith had inventory that was valued at $371m but AC now wrote the value down by $58 million.
- In 2013 Dick Smith had end of financial year clearance sales where the stock was sold off. The clearance sales resulted in $200 million of stock sold for $140 million which became operating cash flow. Due to the write downs $7 million was profit.
- Dick Smith did not restock the inventory so the operating cashflow of $140 million was now also classed as profit.
- AC uses $117 million of the “profit” to pay Woolworths the balance of the purchase plus interest and uses the rest to open 15 new stores and also take over the electronics departments of David Jones.
- AC formulates and delivers PR spin to maximise the company’s initial public offering (IPO) valuation and secure investment opportunities to potential shareholders.
- AC now has a company with little inventory, huge sales growth and big profits. The books look amazing and Ac now forecasts a huge profit for 2014 and the business is floated on the stock market at $2.20 a share which brings in $520 million.
- By 2014 AC had sold the last of the shares and walked away with a $500 million return for their $8 million investment two years earlier.
- The new shareholders were now footing the bill for repurchasing inventory. This should have resulted in a poor operating cash flow, but most of the repurchasing was funded by suppliers.
- At the end of 2015 financial year, the operating cash flow was negative $4 million and the suppliers were demanding payment.
- The shareholders are now forced to take out a $71 million loan to finance purchases while sales and profit margins are sinking. Whilst owing $150 million Dick Smith goes into administration.
- In 2016 the stores are closing down and 3,300 employees are looking for new jobs.
Leading Economist Jason Murphy said; Anchorage had used a perfectly legal accounting maneuver to write down the value of its inventory, raise profits through a national fire sale, neglect to restock shelves and open a massive number of new stores to maximise the company’s IPO valuation.
It’s what private equity firms do, and why some people live in $12 million harbourfront mansions, while others scratch their heads wondering what just happened.
A perfectly legal accounting maneuver is perhaps the reason why “ethics” were not able to trigger the “BUTS”.
About the Author:
Paul Marshall is a HR Pro, corporate trainer, author and a welcomed and trusted business partner with commercial awareness and extensive expertise in people, performance and HR capabilities. With decades of Business and HR experience, the ability to value add fast to business objectives and Company growth strategies, Paul is a past winner of Small Business Development Corporation Award.
A Fellow and Certified Practitioner of the Australian Human Resources Institute (FCPHR).
Paul is an author of:
103 Golden Tips to Turbo Charge your Business make More Money and Get Rich
103 Golden Tips to Turbo Charge your Employees Skyrocket Productivity and Get More Output
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