Buyer beware - Dick Smith

Did Woolworths (WOW) make a huge mistake? Or is the proposed float of Dick Smith just another example of private equity owners bailing out with the cash?

Less than one year after Woolworths dumped the electronics retailer at a massive discount, Anchorage Capital is looking to float the company on the stock exchange.

For years, Dick Smith was the biggest single drag on Woolies earnings. When it did offload the electronics group last year, it was for just $100 million and after having the operation on the market for nine months.

Now, there is talk of floating the group at a hefty $500 million. On the surface, it would appear that a remarkable turnaround has taken place, along similar lines as was sung by those running Myer (MYR) after Texas Pacific Group bought the unwanted emporium from Coles a decade ago.

The spin is that a rejuvenated management team with a new focus has helped push earnings before interest and tax to $80 million this year from $60 million last year.

As yet though, it is impossible to determine whether that has been achieve through slashing costs or revenue gains, which this year rose to $1.3 billion.

Its major competitor JB HiFi (JBH) is a better business with a broader range of offering, with everything from music to movies to bigger ticket items such as television (see Cliona O'Dowd's Collected Wisdom).

Dick Smith operates almost exclusively in the electronics market, which has very slim margins of less than 15%.

Like TPG – which displayed exquisite timing in its late 2009 exit – Anchorage appears to have been jolted into action by the most recent consumer sentiment survey that showed a massive jump in August even before the federal election was held.

Woolworths is understood to be entitled to share in any valuation upside, so don't expect any criticism from the former owners in the upcoming media blitz.