PORTFOLIO POINT: On raw numbers, the Dick Smith sale won’t put much in the pockets of company shareholders. But the deal could bring about some interesting changes in the sector.
It was not lost on the media last week that Woolworths’ (WOW) final sales price for the Dick Smith Electronics business, after having put the For Sale sign out eight months ago, was $20 million – the same price Woolies paid Dick Smith, the man, for Dick Smith, the business, 30 years ago.
So they got out square. Well, not exactly. There’s a small matter of “real” dollars and the fact Woolies wrote down the value of its investment by $420 million in FY12, equating to about 33cps. In selling Dick Smith, Woolies loses 2.9% of total sales and 0.8% of earnings on FY13 forecasts.
But this, and the piddling sales price, are not important. What is important in analyst eyes is that Woolies has relieved itself of the distraction of Dick Smith. And, significantly, it has relieved itself of ongoing lease obligations.
Dick Smith has not been losing money per se, but its debt obligations equal its asset value, Deutsche Bank notes. The current electronic retail climate is concerning enough but the $430 million UBS calculates would have been Woolies’ ongoing lease obligation was the real concern. Woolies has now handed those leases over lock-stock to the buyer, local private equity firm Anchorage Capital, and what’s more, an undisclosed deal has been struck that sees Woolies participating in the spoils of any future profit when Anchorage comes to flip the business, as is the private equity game’s goal.
At the same time, Woolies also divested of its Woolworths Wholesale India business to a Tata subsidiary for $35 million. The two divestments are in line with the strategic review management began last year, and analysts can only see positives in Woolies now having put these assets and their troubles behind them.
But what does it all mean for the rest of the sector, notably competitors JB Hi-Fi (JBH) and Harvey Norman (HVN)?
Well at face value, both would have grimaced to learn Anchorage plans to keep all 325 Dick Smith stores as going concerns and may even add more down the track. The preference would have been for Dick to be closed down and sold for scrap, but barring that at least a consolidation of store numbers and a rationalisation of the business would have removed some of the competitive pressure. As it is, JBH and HVN remain in the same boat, with the former more directly a competitor of Dick’s than the latter. The difference is, at least in Deutsche’s view, that the risk of aggressive discounting of product lines in the short term is removed.
Having said that, other analysts note that Dick Smith under Anchorage will be operating on a much smaller capital base than the competition, providing scope to chase sales to drive earnings, as Citi notes. JP Morgan further points out that Woolies’ Big W stores still operate in electronics and might now prove a tougher competitor.
Citi, for one, has retained a neutral rating on Woolies and a sell on both JB and Harvey.
Any changes to analysts’ Woolworths forecasts post the sale have been negligible. On an isolated basis, UBS is still concerned Woolies’ own supermarket roll-out plans will lead to cannibalisation in an environment of rising costs. UBS also retains neutral.
Greg Peel is a journalist for FNArena, an online news and analysis service.
Readers should note all names are mentioned for educational and informational purposes only. Investors should always consult with a licensed professional before making investment decisions.