The float of Dick Smith in early December doesn't stack up - or at least the $520 million price tag doesn't. It just doesn't sound credible to make a three-plus bagger return on an investment held for only a year. On Tuesday morning the Woolworths boss Grant O'Brien, who sold the consumer electronics business to private equity group Anchorage for $94 million, will be asked by his shareholders to explain that commercial riddle.
He either has to try for a mea culpa suggesting Woolworths potentially left more than $400 million on the table because it was incapable of running a consumer electronics chain or had taken its eye off the ball - or a combination of the above.
O'Brien could take some of the heat out of the debate by questioning the value of the upcoming sale by Anchorage. This isn't really politics and it's not playing nice but it is a fair call.
Woolworths undoubtedly did a lousy job selling Dick Smith. It took nine months from announcement to execution and the initial sale price was $20 million but with a potential upside kicker that ultimately dragged up the total by $74 million. (Woolworths could have got more still had it stuck to the original formula to receive upside based on the value of the upcoming IPO.)
O'Brien will probably stick to his existing line that the company is one that operates in big-volume markets with broad-based merchandise - and the smaller specialty businesses like Dick Smith don't fit that cookie cutter.
(This line could expose Woolworths to questions about why its Masters homeware and hardware start-up has been a disappointment from an executional and a financial standpoint.)
He would be closer the mark to say that the consumer electronics business market is really difficult and the potential rainmakers from inside Woolworths were never going to aspire to climb the Dick Smith ladder. Ambitious managers with talent in Woolworths need to show how to sell groceries, fresh food and liquor - and how to better data mine their customers.
Several years of lacklustre performance from Dick Smith under the ownership of Woolworths exaggerated attention on the group's shortcomings and its inability to resuscitate a difficult business. And it's worth noting that retail department stores (another form of retail conglomerates) have had similar troubles. Myer has been edging out of some consumer electronic categories and David Jones is in the process of installing Dick Smith as a concession to take it out of direct sales. It is a category that has been more structurally challenged by the internet than most.
This brings us to the Dick Smith IPO listing. The more nimble specialists with plenty of incentive to heap attention on consumer electronics are going to do it better than companies like Woolworths, Myer and David Jones and discount department stores like Target, Big W and Kmart. But a turnaround of the magnitude suggested by the value of the Dick Smith IPO is not plausible. Even if one takes into consideration better supply chain, IT and inventory management, new product releases and more focused management, it doesn't account for a three-fold increase in value.
On a like-for-like basis (i.e. a same-store basis) Dick Smith revenue projections contained in the prospectus will not improve in the first year housed in a stand-alone public structure. There are some gains to be made by better gross margins and cost take-out but again not enough to explain the three-fold turnaround in value. It will achieve revenue gains by better internet sales and a turbo-boosted rollout of additional physical stores. In 2014, as a listed company, Dick Smith says profits will be a bit more than twice that made in 2012 - the last year under the stewardship of Woolworths.
If the IPO is to succeed and for the after-market to hand new investors a profit two sets of tailwinds need to be blustering. The first is a pick-up in consumer sentiment, the second is a sustained rise in the equity market.
At this point the latter is more likely. Anchorage has stated its intention to retain a 20 per cent stake in Dick Smith until June next year. It's the sort of gesture that IPO investors are now demanding to avoid the Myer curse that took place a few years ago after its private equity owners sold out completely, earnings forecasts fell short and the shares tanked.
Nine's major hedge fund shareholders have had to retain about one-third of their stock for a year or more to get the float away next month. But there is a sting in the tail. It is the overhang that will stay around until these unnatural shareholders exit their stock.
But back to Woolworths. O'Brien will just have to wear some heat on some retail brand mistakes, just as Wesfarmers' Richard Goyder spends so much time justifying why it puts up with the troubled Target.
But in the end the performance of Woolworths is all about selling food and liquor and the most recent quarterly figures were good.