So Dick Smith (DSH) has just gone into liquidation after listing in 2013. What happened?
Private equity group Anchorage Capital bought Dick Smith from Woolworths in 2012 for an initial payment of just $20m.
Anchorage then “dressed the company up to look good for just one thing – to persuade people to buy shares,” according to analysts from Forager Funds Management.
Anchorage “wrote down the value of the inventory, took provisions for future onerous lease payments, wrote down the value of the plant and equipment and liquidated a lot of the inventory as quickly as they possibly could to throw off cash,” according to Forager’s Steve Johnson.
The cash was then used by Anchorage to effectively make Dick Smith ‘buy itself’.
The writedowns inflated profits, a key factor in enticing investors into the company.
For example: a stock item that may have been bought for $100 may have been in the books at $60 after the writedowns, which meant an extra $40 profit on every sale.
The writedown of plant and equipment lowered depreciation charges, also boosting the bottom line.
“But when they liquidated all that inventory to pay for the purchase price, they didn’t replace it,” according to Forager’s Steve Johnson.
“And the new owners of the business, since it’s been listed on the stock market, have had to put in a lot more money to fund the increase in inventory.”
Coupled with an aggressive expansion plan which added 75 stores (25% more stores), Nick Abboud helped bring Dick Smith into the ground.