The prospect of floating Dick Smith a mere 12 months after Anchorage Capital acquired the chain from Woolworths will be bemusing for some, and will perhaps be seen as something of an indictment of its former owner.
There have been reports that the private equity firm has hired advisers to help assess its options, including an initial public offering. Dick Smith’s management has been talking up the extent of the turnaround they've achieved.
Initially, Anchorage only paid $20 million for the chain, but earlier this year it handed over a further $74 million to Woolworths to buy itself out of a deal that would have given the retail giant a share of any upside in the value of the electronics retailer, which itself underscored its confidence in the future of the business.
The Dick Smith group was actually profitable when Woolworths sold it. In 2011-12, just ahead of the sale, it had earnings before interest and tax of almost $25 million. Its sale base of about $1.5 billion was growing.
Woolworths would say that the business it sold wasn’t the business it had owned. It had taken a hit of more than $400 million from restructuring the chain, closing unprofitable stores and writing down its value before the sale.
The problem Woolworths faced with Dick Smith was that it was ultimately too small to make a meaningful difference to the giant retailer’s numbers, but consumed a considerable amount of senior management’s attention. Despite a lot of effort and several format changes, Woolworths was never able to generate consistent performance from the business.
It was also in a category that faces structural challenges. Electronics is the sector most affected by the strength of the dollar and by the shift to online retailing. However, in any event, Woolworths' Big W brand could give it a more manageable presence. While Woolworths handed the chain over for a relatively modest sum, it also rid itself of the lease liabilities associated with the stores.
Anchorage, chaired by a veteran turnaround specialist Phil Cave, hired Nick Abboud from Myer as its chief executive and brought in former Woolworths executive and former Myer chairman Bill Wavish as a non-executive director/consultant.
They’ve been opening new stores and recently signed a deal to manage David Jones’ electronics offer in an effort to further ‘’fractionalise’’ their costs. They also bring far more focus to the business than it could have received within Woolworths.
The segment remains challenged, but JB Hi-Fi and others have shown it is possible to generate profitable growth. The restructuring of the sector as the bigger department stores and discount department stores have shrunk their presence should be a positive, although the growth in online sales remains a significant longer-term threat.
The curious and cynical will question why Anchorage, which appears to have doubled Dick Smith’s earnings in 12 months, should be looking at options for exiting or selling down its interest so quickly.
If it proceeds with some form of sale, that is a question only Anchorage can respond to and, given the scepticism towards private equity-sponsored IPOs, it is a question it will surely be asked if and when a sale proceeds.