Dick Smith Collapse Case Study
Added on 2020-03-07
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Financial Case Analysis of Dick Smith Holdings 1
Introduction This report aims to provide a broad view on the case study of Dick Smith brand which wasliquidised on 25th July 2016 with a massive loss to the investors of the company (Chung, 2016).Though, the company was again purchased by Kogan.com at the same time with an undisclosedamount, it was speculated that the amount of the company in Australian security Exchange(ASX) listing was false and hyped. In this context, the study describes a brief history ofownership of the company Dick Smith brand. Furthermore, this research is focused on theevaluation of two different situations of the DSH’s valuation related to when it was offered to thepublic in the beginning and when the company was acquired by Anchorage Capital Partners fromWoolworths in 2012 (Chung, 2016). In addition to this, the study also elaborates ethical issuefaced by the top level management of the company when the company was listed in ASX in2012 and by Anchorage Capital Partners pertaining to floating business. A Brief summary of the Dick Smith brand Dick Smith Company was commenced by Dick Smith in Atarmon, Sydney in 1968 under arented car park space (Ryan, 2015). The company mainly focused to install car radios as a smallbusiness with just $610 as an initial capital. During 1970 to 80’s company was expanded byvarious product lines and ranges with around 20 stores in Australia. In 1980, 60% of thecompany’s shares holding by Dick Smith’s wife were sold to Woolworths. Moreover, remaining40% of Dick Smith Company’s shares were fully owned by Woolworths in 1982 with a totalworth of $25 million Woolworths purchased the Dick Smith brands whole company (DickSmith- Annual Report, 2014). After that, Woolworths Company restructured Dick smith brandbut then, closed up to 100 stores of the company and later on sold the company to AnchorageCapital Partner’s for $115 million. $20 millions were paid upfront by the company to purchase itfrom Woolworths (Dick Smith- Annual Report, 2014). The company appointed Nick Abboud asits chief executive in November, 2012. Besides that, it has been reported that just after a year,Dick Smith listed its shares on ASX with a capital floating of $520 million in December, 2013.In January 2016, company collapsed into voluntary administration in which McGrathNicol wasappointed by company’s board, whereas investors appoint Ferrier Hodgson as a receiver (West,2016). In present Scenario, Dick Smith brand is being owned by Kagon.Com from May 2016that sold its product online only. 2
Assessment of the valuation of Dick Smith brand at the time of Initial Public Offering andwhen acquired by Anchorage capital partners At the time of acquisition from Woolworths in November 2016, Anchorage capital partnerspurchased it by offering initial capital of $20 million and total amount of $115 million (Ong andJanda, 2016). However, it has been analysed that cash of Anchorage’s was only $20 million withno credits or loans from the market. In December 2013, the company floated Dick SmithHolding’s shares in Australian security exchange with market capitalisation of $520.3. From theAnnual reports, it has also been realised that during this one year Dick Smith holding’s EBITDAwas increased from $23million to $74.4 million (Dick Smith- Annual Report, 2014). On thecontrary, it has also been examined that EBITDA growth was found on irregularities in inventorymanagement. The written of values from assets was not explained properly such as in November2012, written off value of plant and equipment was $54 million, whereas inventory which wasbooked as $312 million from $371 million having depreciation of $58 million (AnchorageCapital Partner, 2016). On the other hand, non-current provisions were written down by $8million and all these adjustments were stated as fair value. Within 7 months, the inventory wasdeclined by $171 million in 30th June, 2013. Due to plant and equipments written down in 2013,depreciation in 2014 was only of $10 million. These adjustments and representation could be thereason of growth in EBITDA in 2014 to $74.4 million swiftly (Dick Smith- Annual Report,2014). It has also been noticed that loans and borrowings of Dick Smith Holding in 2015 was increaseswith $70.5 million which was not presented in 2014 accounting books. Apart from thisrepresentation which was related to scrutiny and high level of debt, all the representation in thebooks of 2015 was normal and convincing (Ong and Janda, 2016). At the same time, when thecase was examined closely, company did not indicate a sound business practice as debt ratio wasrecorded as 67% in year end of 2015 which is very risky and elevated. In 2015 ending, DickSmith Holdings was not able to arrange its short-term debts due to dearth of working capitalwhich was 1.23:1 (Dick Smith- Annual Report, 2014). In addition to this, inventory turnoverratio was examined as 2.9:10 which was not increased with a significant rate from 2014. Thecompany was dysfunction due to no long service leave was granted in the year ending 2015.Meanwhile, announcement of failure in the operation and continuous breakdown of prices on3
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