Case Study: Applied Corporate Finance (FIN342) - Dick Smith Group

This assignment presents a detailed analysis of the financial performance of Dick Smith Group (DSG) for the six-month period leading up to its voluntary administration in January 2016. The analysis reveals a consistent pattern of net losses, particularly exacerbated in November and December 2015 due to significant inventory obsolescence and heavy discounting. The report highlights key financial indicators such as declining sales, negative gross profits in certain months, and substantial EBITDA losses. A significant impairment charge on inventory further contributed to the company's financial distress, ultimately leading to the appointment of administrators. The case study utilizes data from administrator reports and other publicly available information to provide a comprehensive understanding of the factors contributing to DSG's financial collapse.

Applied Corporate Finance
(FIN342)
Assignment2
Total marks: 100
Personal ID: [Enteryour PersonalID]
I have read the Assignment Guide in the ‘General assessment information’ and have applied the
word count principles to my work.
My word count for this assignment is: [Enter your word count] words
Your assignment should be loaded into KapLearn by 11.30 pm on the due date.
All times are based on AEDT/AEST time zones.
Refer to ‘Time remaining’ on the ‘Assignment’ page in KapLearn to ensure you submit
your assignment by the specified due date and time.
Checklist
 I have completed my assignment using Word.
 I have completed my assignment using Calibri, Arial, Times New Roman or Verdana fonts.
 I have added my Personal ID on this page.
 I have added my word count on this page.
 I have added my Personal ID in front of the filename in the footer on the second page.
 I have saved the file to be uploaded as PersonalID_FIN342_AS2_v3A2.
 Each question of my assignment is within the word limit guidelines for that question as per the
‘General assessment information’ (Assessment Assignment General assessment information).
 My assignment file size is no larger than 2 MB.
 If tables were required, they are visible as text, not as links or images.
 I have not removed the marking grid from the footer.
 I have submitted my assignment as per the instructions in KapLearn.

Marker feedback
Comment on overall performance:
For marker use only.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 2 © Kaplan Higher Education

Instructions to students
• This assignment covers all topics of this subject and accounts for 50% of your final grade.
• There are three (3) questions in this assignment. You should answer all questions.
• The overall word limit for the assignment is 4500 words. Marks will only be awarded for answers up
to the word limit (plus 10%) for each question. Any material written after this will not be counted
towards your mark for that question. Headings, quotes and references within the body of the answer
are included in the word count. Numerical tables, calculations, and reference lists are not included.
For more information on word counts and their rationale, go to Assessment  Assignment
General assessment information.
• Your report should be concise and specific and should contain only the relevant information as specified
in each question. You may set out your report in point form where appropriate.
• Ensure you answer the question asked (i.e. take note of the specific requirements of the question).
• The emphasis of this assignment is on evaluating and analysing financial and other data and information.
• Further research is required beyond the information contained in the subject materials and textbook.
• Important note: Do not approach anyone associated with Dick Smith Group of Companies (‘DSG’)
directly for information. Refer to the details provided regarding recommended information sources in
the introduction to this assignment. You may also use other information sources identified through your
independent research.
• Refer to the Criteria-based Marking Guide for guidelines on what is expected for each question.
• The ‘General assessment information’ section in KapLearn contains information about format and
presentation, word limits, citations and referencing, collusion, plagiarism and other policies,
useful resources, submitting your assignment and accessing your results.
• Answers are to be in your own words. Reference and cite all your sources (within the text of your
answer) when quoting or using material from external sources. Include a reference list at the end ofyour
assignment. Refer to the ‘Referencing and Citations Guide’ available from the ‘Library Learning Hub’ in
KapLearn for further information on referencing.
• Indicative weightings are noted beside each question. Use these weightings to assist you with your
allocation of time and resources. The weightings indicate the relative importance of each question.
• State all assumptions used in providing your answer.
• Requests for special consideration or information pertaining to special consideration written in the body
ofthe assignment will not be considered by the marker. Refer to the ‘special consideration’ section of
the Assessment Policy on Kaplan’s website for more information.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 3 © Kaplan Higher Education

Learning outcomes (LO) mapping Marks
1. Discuss the objectives and processes of corporate financial management and apply them in
a practical setting. 0
2. Evaluate corporate financial management strategies. 40
3. Propose the key financial issues surrounding the creation of shareholder value. 20
4. Integrate the key theories that inform the fundraising and capital structure management
process. 10
5. Compare the roles of the key stakeholders and decision makers in a corporation’s financial
management. 30
Total marks 100
Criteria-based Marking Guide
The Criteria-based Marking Guide, provided at the end of each question, is designed to assist students to
understand what is expected of them in each question and to let them know how their performance will be
judged. It provides advice about the criteria used in the marking of the question and what discriminates
between an excellent, satisfactory and unsatisfactory answer.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 4 © Kaplan Higher Education

Case Study: Dick Smith Group
This assignment gives you the opportunity to apply the material covered in ‘Applied Corporate Finance’
(FIN342) to an Australian company that has had a mixed history of success and failure in the Australian
marketplace.
The Dick Smith Group of companies (‘DSG’) has had a high profile in the financial press since late 2015.
Hence, it represents a good case study to use to analyse a number of corporate financial management
issues relevant to this subject.
Dick Smith Holdings Limited (ASX Code: DSH) is the holding company of the Dick Smith Group (‘DSG’) that
consists of 11 wholly owned subsidiaries. DSH is the ASX code for Dick Smith Group of Companies (DSG).
In this assignment, Dick Smith,DSG and DSH are used interchangeably to mean the same entity. DSG
operated the consumer electronics retail stores and an online consumer electronics retail business
throughout Australia and New Zealand, operating from more than 390 locations with at least 3,000
employees. The majority of the network was branded as ‘Dick Smith’ stores but also incorporated ‘Move’
bannered stores, ‘Electronics Powered by Dick Smith’ outlets in David Jones stores, and commercial and
online businesses.
The company was founded in 1968 by Mr Dick Smith and owned by him and his wife until 1982.
Woolworths Limited purchased Dick Smith Electronics in 1982 and then sold the company to Anchorage
Capital Partners in 2012, which floated DSG on the Australian Securities Exchange (ASX) in 2013.The IPO
was successful and the share price remained stable at near the offer price of AUD2.20 per share.
In 2015, concerns emerged about trading performance, inventory management and buyer rebates and
their collective impact on cash flow.The share price weakened dramatically.
By December 2015, the share price had fallen 80%. On 4 January 2016, DSH (and associated entities)
was placed into voluntary administration by the Board. Subsequently, a syndicate of lenders appointed
Ferrier Hodgson as receiversand managers.The online operations and Dick Smith brand were sold to Kogan
(May 2016) and the remainder of the business was liquidated.
Recommended information sources
The following information sources may assist you:
• DSG prospectus, annual reports and financial statements — available for download from the DatAnalysis
Premium database in KapLearn under ‘Library’ using the stock code ‘DSH’.
Note: Where there is conflicting data within different reports use the later reports.
• DSG investor communications and presentations — available for download from the DatAnalysis
Premium database in KapLearn under ‘Library’ using the stock code ‘DSH’.
• Other articles and reports on Dick Smith Group of Companies available online.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 5 © Kaplan Higher Education

Question 1 Analysis of financial performance (20marks | word limit: 700 words)
Analyse the financial performance of DSG for the six-month period from 30 June 2015 and comment on key
factors that led to the voluntary appointment of administrators on 04 January 2016.(20marks)
Criteria-based Marking Guide for Question 1
Excellent Satisfactory Unsatisfactory
• rigorous analysis of financial
performance data
• measures of financial
performance addressed and are
all relevant, appropriate and
accurate
• analysis and data presented in a
clear and logical manner
• adheres to word limit
requirements
• reasonable analysis of financial
performance data
• measures of financial
performance addressed and are
mostly relevant, appropriate and
accurate
• analysis and data presented in a
reader-friendly manner
• inadequate analysis of financial
performance data
• little or no specific measures of
financial performance addressed;
or measures not
relevant/appropriate/accurate
• poorly presented information
• not attempted
(Range: 20marks) (Range: 15–20marks) (Range: 10–14marks) (Range: 0–9 marks)
Insert your answertoQuestion 1below this line
According to the report produced by the administrator of Dick Smith Group, McGrathNicol, in July 2015
sales of DSG was 97.2 million dollars. Gross profit in the month was 17.1 million dollars. Net profit after tax
was – 1.3 million dollars (net loss).
In August 2015, sales of DSG were $ 93.9 million; gross profit was $ 17 million; and net profit after tax was
- .3 million dollars (McGrathNicol, 2016).
In September 2015, sales of DSG were $ 131.1 million; gross profit was $ 37.2 million; and net profit after
tax was $ 1.6 million.
In October 2015, sales of DSG were $ 89 million; gross profit was $14.8 million; and net profit after tax was -
$3.4 million (net loss).
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 6 © Kaplan Higher Education

In November 2015, sales of DSG were $85.2 million; gross profit was – 46.4 million; net profit after tax was
– 42.8 million dollars.
In December 2015, sales of DSG were $ 200.1 million dollars; gross profit was 13.8 million; net profit after
tax was – 70.5 million dollars.
It can be seen that DSG posted net loss in each month in the six month period after June 2015. The month
of November 2015 was particularly bad. In this month it was unable to post gross profit. This means that
the cost of sales was more than the revenue from the sales. This happened because the company had to
give huge discounts to clear its obsolete inventory. Heavy discounts were given in both November 2015 and
December 2015 to clear the inventory. Total loss reported by the company in the months of November and
December, 2015 was $113 million.
EBITDA (Earnings before interest, taxes, Depreciation, and Amortization) losses in the six month period
were $114 million.
Inventory of the company had become so obsolete that an impairment charge of $60 million had to be
taken on the value of the inventory.
Net cash inflow in the six month period after June 2015 was $ 1.7 million. So the company was able to
generate positive net cash inflows in the six month period even after the losses.
Cash & cash equivalents of DSG on 31st December 2015 stood at $31.2 million. Total debt that was due to
mature over the next one year stood at $ 20.2 million.
Key factors that led to voluntary appointment of administrators on 4th January 2016 were:
1. Very low cash flow generated by operations.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 7 © Kaplan Higher Education

2. Insufficient cash balance to purchase new stock.
3. Delays in payment to operational suppliers.
4. Onerous lease obligations.
5. Obsolete inventory of stock.
End of answers to Question 1
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 8 © Kaplan Higher Education

Question 2 Analysis of strategic issues (30 marks | word limit: 1400 words)
(a) Critically analyse the expansion strategy of DSG. (500 words)(10 marks)
(b) Summarise the reasons why DSG failed. (900 words)(20 marks)
Criteria based marking guide for Question 2(a)–(b)
Excellent Satisfactory Unsatisfactory
(a) • clear, accurate demonstrated
knowledge of the expansion
strategy
• thorough research into concept
of best practice with
accompanying sound analysis
• logical, convincing explanation of
how actions compared to best
practice
• adheres to word limit
requirements
• some demonstrated knowledge
of the expansion strategy
• adequate research into concept
of best practice with some
analysis
• reasonable explanation of how
actions compared to best
practice
• little or no demonstrated
knowledge of the expansion
strategy
• little or no research into concept
of best practice with little or no
analysis
• inadequate explanation of how
actions compared to best
practice
 not attempted
(Range: 10 marks) (Range: 7.5–10 marks) (Range: 5–7 marks) (Range: 0–4.5 marks)
(b) • logical and comprehensive
discussion on why DSG failed
with evidence of facts and figures
• adheres to word limit
requirements
• reasonable discussion on why
DSG failed with evidence of facts
and figures
• inadequate discussion on why
DSG failed with little evidence of
facts and figures
 not attempted
(Range: 20 marks) (Range: 15–20 marks) (Range: 10–14.5 marks) (Range: 0–9.5 marks)
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 9 © Kaplan Higher Education

Insert your answers to Question 2(a)–(b) below this line
2(a)
DSG’s core activity was operating consumer electronics retail stores in New Zealand and Australia.
These brick-and-mortar stores were complemented by an online retail store. In 2013 DSG got listed
at the Australian Securities Exchange (Anchorage Capital Partners, 2013). Post this IPO listing the
company embarked on an expansion plan. The expansion strategy was mainly organic in nature.
Organic means that it involves opening new stores of the company for expansion. Inorganic route is
where a company acquires other companies for achieving expansion. So DSG started a new chain of
retail stores under the Move brand. It entered into a partnership with David Jones to run and
operate retail stores under the David Jones brand. “Move by Dick Smith,” stores opened up in duty
free locations at airports. It also showed some inorganic expansion, when it purchased the Mac 1
stores in September 2014. Mac 1 stores were resellers of Apple products (McGrathNicol, 2016).
To finance this expansion strategy, DSG used both internal cash reserves and also borrowed. Use of
internal cash reserves ultimately led to decline in cash balances. Due to this decline in cash
balances it was later on unable to pay its suppliers in a timely manner. It also found it difficult to
pay back the obligations on its debt.
One of the objectives behind this expansion strategy was to enable DSG to target different market
segments. This in turn would increase its sales.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 10 © Kaplan Higher Education

2(b)
DSG failed because a number of reasons. The main reasons were:
1. Market related factors: Market related factors played an important role in this failure. High
competition in the consumer electronics retail industry in Australia and New Zealand resulted
in erosion of profit margins of DSG (Blanchard, 2017). It was unable to control its overhead
expenses. Its overhead expenses were on average, 9% higher than those of its competitors.
Among the nine key competitors in the consumer electronics retail market DSG had maximal
number of stores at 394 stores. But it was only the sixth largest player with just 9% of the
market share. JB Hi-Fi, the market leader, had 26% market share with just 187 stores. DSG’s
store network expansion strategy did not translate into proportionate increase in sales.
Competition also intensified because of the coming of online retailers. These retailers were
able to sell products at lower prices to customers because of their lower cost base and more
flexible inventory management capabilities. Increase in life cycle of personal computers (PCs)
also contributed to the troubles of DSG. They lowered demands for PCs for office use. Office
sales were important as they contributed to 40% of the total sales of DSG.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 11 © Kaplan Higher Education

2. Failure of the expansion strategy: Another reason of failure was aggressive expansion using
internal cash reserves and external debt. This resulted in deterioration of the financial health of
the company. It continued to open new stores while same store sales continued to decline. This
expansion strategy resulted in reduction of returns on invested capital of DSG. At the same
time it considerably increased the debt burden or leverage of the company, thereby increasing
its financial risk. The company’ total debt increased to $ 127 million from $ 71 million in the six
month period between June 2015 and December 2015 (McGrathNicol, 2016). These borrowings
were raised as the company was unable to raise enough cash to pay its suppliers; meet its
capital expenditure requirements. While it was facing this cash crunch it also paid dividends to
its shareholders. This worsened its slide.
3. Purchasing decisions: The management of DSG bought stocks for the stores on the basis of
rebates given by suppliers, and not on the basis of customer demand. This ultimately resulted
in the company having items in its stock that did not have much customer demand.
4. Inventory management: The Company built huge inventory. Due to rapid technological
innovation and changing customer preferences because of this innovation, the inventory of the
company soon became obsolete. Ultimately it had to dispose a large part of this inventory at
heavily discounted prices. It also had to take a $ 60 million write-down on its inventory
(McGrathNicol, 2016). The obsolescence of items in the inventory of DSG can be assessed from
the fact that even during the peak Christmas shopping season of 2014, the company was not
able to reduce its inventory by a significant amount.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 12 © Kaplan Higher Education

The private label strategy also was a cause of DSG’s failure. Private label strategy meant that
DSG also had its own brand of consumer electronic products. This involved getting electronic
products manufactured from contract manufacturers. This increased supplier commitment and
inventory levels of DSG significantly. It had to later on take down significant write-down on this
inventory.
5. Product Mix: DSG’s product mix deteriorated further because many of the suppliers had
stopped supplying to it because of the large dues it owed to them. Some suppliers, such as
Apple, had put it on cash-on-delivery terms. At the time it was put into administration, 16 of its
major suppliers had either put it on stop delivery or cash on delivery or bank guarantee before
delivery.
End of answers to Question 2(a)–(b)
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 13 © Kaplan Higher Education

Question 3 Value creation and M&A (50 marks | word limit 2400 words)
In a relatively short period of time, Dick Smith was subject to a series of significant corporate
transactions.The sale of the business by Woolworths to the private equity fund Anchorage (November
2012); the sale of the restructured business by Anchorage to the public by way of an IPO (December 2013);
and, the financial collapse of the business requiring the voluntary appointment of an administrator (January
2016).
These corporate transactions received significant attention from the media and other parties, often with
the benefit of hindsight.
Please refer to the following source documents:
• Dick Smith prospectus 21 November 2013 (available on MorningStar DatAnalysis database in KapLearn
under ‘Library’)
• Article by Matt Ryan of investment fund Forager ‘Dick Smith is the greatest private equity heist of all
time’ 29 October 2015, available at https://foragerfunds.com/bristlemouth/dick-smith-is-the-greatest-
private-equity-heist-of-all-time/ (viewed 5 April 2017)
• Submission to Senate Inquiry by Anchorage Capital Partners in conjunction with the Parliament of
Australia 18 March 2016(download submission 12 — viewed 4 April 2017)
<http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Dick_Smith/
Submissions>.
• Extract from Chanticleer article AFR 11 February 2016 (Schedule 6 in Anchorage submission – see web
address above)
• Extract from Chairman’s Statement Dick Smith AGM 28 October 2015 (reproduced below) (available on
MorningStar DatAnalysis database in KapLearn under ‘Library’)
Cashflowduringtheyearwasimpacted bythe decisiontoavailourselvesof beneficial
inventorybuyingopportunities. This involvedtheCompanybuyinginventoryearlierin theyear
thannormal to take advantageoffavourable exchangeratesandproductpricesandresulted inthe
paymentof this inventorybeforetheendof theyear.YourDirectors
anticipateimprovedcashconversionin 2016, despitethechallengingretail environment.
Notwithstanding the cash flow impact,the Company’sbalancesheet remains strong.Your
Directors are pleased to declare a 5 cent per share fully franked dividend, which was paid on 30
September 2015.
(a) ‘The price Woolworths received for the sale of Dick Smith was ridiculously low.’
Reflect on this statement made by a disgruntled Woolworths’ shareholder shortly after
Anchorage announced the Dick Smith IPO. Based upon information available at the time of the IPO,
including the prospectus, and given the prevailing circumstances when Woolworths sold Dick Smith,
comment on the validity of the opinion expressed in this statement.(5 marks)
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 14 © Kaplan Higher Education

(b) List the major issues of concern raised in the article by Forager and comment on the validity of these
issues.Include in your answer, as appropriate, statements made by Anchorage in its submission to
the Senate Inquiry. (12 marks)
(c) Within the context of value creation, assess the sustainability and efficacy of the transformation
strategy and initiatives undertaken by Anchorage.(12 marks)
(d) Reflect on the statement (made by a retail analyst when the Dick Smith share price collapsed):
‘Only a fool would buy shares in an IPO where a private equity fund is the exiting vendor.’ Why might
such a view be misguided and potentially result in poor investment decisions? (8 marks)
(e) Review the post IPO share register (refer to the IPO top 20 shareholding notice) and the post IPO
share price performance of Dick Smith. What inferences (if any) can be made on the market view of
the veracity of projected performance for the company as set out in the prospectus.(8 marks)
(f) Reflect on the statement made by a fund manager when Dick Smith went into voluntary
administration: ‘The market gets it right nearly all of the time.But it was wrong on Dick Smith.’
Discuss whether you think the market ‘got it wrong’.(5 marks)
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 15 © Kaplan Higher Education

Criteria based marking guide for Question 3(a)–(f)
Excellent Satisfactory Unsatisfactory
(a) • Comprehensiveunderstandingof
the issues related to price and
value within the context of a sale
process
• Comprehensive understandingof
the specific issues related to the
sale of Dick Smith by Woolworths
• Basic understanding of the issues
related to price and value within
the context of a sale process
• Basic understanding of the
specific issues related to the sale
of Dick Smith by Woolworths
• Weak understanding of the
issues related to price and value
within the context of a sale
process or not attempted
• Weak understanding of the
specific issues related to the sale
of Dick Smith by Woolworths or
not attempted
(Range: 5 marks) (Range: 4–5 marks) (Range: 2.5–3.5 marks) (Range: 0–2 marks)
(b) • Rigorous analysis of claims made
by Forager
• Evidence of comprehensive
understanding of broader issues
relating to the involvement of
Anchorage
• Reasonable analysis of claims
made by Forager
• Evidence of basic understanding
of broader issues relating to the
involvement of Anchorage
• Inadequate analysis of claims
made by Forager
• Not attempted
(Range: 12 marks) (Range: 9-12 marks) (Range: 6–8 marks) (Range: 0–5 marks)
(c) • Rigorous analysis of value
creation by Anchorage
• Evidence of comprehensive
understanding of efficacy and
sustainability of the
transformation initiatives
• Reasonable analysis of value
creation by Anchorage
• Evidence of basic understanding
of efficacy and sustainability of
the transformation initiatives
• Inadequate analysis of value
creation by Anchorage
• Not attempted
(Range: 12 marks) (Range: 9-12 marks) (Range: 6–8 marks) (Range: 0–5 marks)
(d) • Comprehensiveunderstandingof
the issues related to the
appraisal of potential investment
in an IPO and whether or not the
involvement of a private equity
fund is a material factor
• Basicunderstandingof the issues
related to the appraisal of
potential investment in an IPO
and whether or not the
involvement of a private equity
fund is a material factor
• Weakunderstandingof the issues
related to the appraisal of
potential investment in an IPO or
not attempted
(Range: 8 marks) (Range: 6.5–8 marks) (Range: 4.5–6 marks) (Range: 0–4 marks)
(e) • Comprehensiveunderstandingof
the issues related to interpreting
share register information and
investment decisions
• Basicunderstandingof the issues
related to interpreting share
register information and
investment decisions
• Weakunderstandingof the issues
related to interpreting share
register information and
investment decisions or not
attempted
(Range: 8 marks) (Range: 6.5–8 marks) (Range: 4.5–6 marks) (Range: 0–4 marks)
(f) • Comprehensiveunderstandingof
the issues related to equity
market trading in conjunction
with a thorough commentary on
the share price performance of
Dick Smith
• Basicunderstandingof the issues
related to equity market trading
in conjunction with a basic
commentary on the share price
performance of Dick Smith
• Weakunderstandingof the issues
related to equity market trading
or not attempted
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 16 © Kaplan Higher Education

(Range: 5 marks) (Range: 4–5 marks) (Range: 2.5–3.5 marks) (Range: 0–2 marks)
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 17 © Kaplan Higher Education

Insert your answers to Question 3(a)–(f) below this line
3 (a )
The opinion that the price Woolworths received for the sale of Dick Smith was ridiculously low is not valid.
Total payment that Woolworth’s received for selling its stake in Dick Smith was $ 115 million (Greenbalt,
2013). $20 million of this was received at the time of the sale and the remaining $95 million was received
just before the IPO. At the time when Woolworths sold Dick Smith to Anchorage capital, net profit of Dick
Smith was just $ 7 million. This implies a Price – to – Earnings (P/E) ratio of 16.42 times ( $ million / $ 7
million) at the price at which Woolworths sold it to Anchorage. This is not a P/E ratio at which the price paid
can be considered to be ridiculously low. Average P/E ratio at which All Ordinaries Index of ASX has traded
in the long run is 10 (Chandra, 2017).
The IPO after its listing valued Dick Smith at $ 520.3 million. But this valuation was on the basis of the
projected turnaround that the management of Anchorage Capital said that it had achieved after acquiring
Dick Smith from Woolworths. In 2013, a year after the purchase from Woolworths, the management of
Anchorage had forecasted profit for next year of $ 40 million.
The situation in which Woolworths sold Dick Smith to Anchorage also needs to be kept in mind. Dick Smith
contributed just 1% to the revenues of Woolworths (Greenbalt, 2013). It acted as a distraction for the
management of Woolworths. The management was then busy in a tough competitive battle with Coles.
3 (b)
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 18 © Kaplan Higher Education

The issues raised in the article , “Dick Smith is the greatest private equity heist of all time,” by Myatt Ryan of
investment fund Forager are highly relevant and valid (Ryan, 2015). It shows how the private equity fund
Anchorage capital manipulated to create huge profits for itself at the cost of shareholders who bought
shares in the IPO of DSG. The article lists the following main points:
 It says that Anchorage first created Dick Smith Sub-holdings to acquire Dick Smith from
Woolworths. This holding company was created by issuing $10 million of equity capital to
Anchorage. So Anchorage invested $10 million in this business. Dick Smith had $12.1 million in cash
holdings at the time of acquisition. With the $10 million it had invested and with $12 million it got
after the acquisition, Anchorage made the initial payment of $20 million to Woolworths.
 After the acquisition the first thing that Anchorage did was to take a write-down of $ 58 million on
the inventory of Dick Smith; $ 55 million write-down on the plant and equipment of Dick Smith; and
$ 8 million in provisions. Anchorage wanted to generate cash by selling the inventory at a discount.
But without a write-down this sale of inventory would have appeared as a loss on its financial
statements. So it first made the write-down on the inventory so that it could show a profit from the
sale of inventory even after selling it at a discount. After this write-down in inventory, a big
clearance sale of the inventory of Dick Smith was done. Heavy discounts were offered in this
clearance sale. The clearance sale generated $140 million in operating cash flows. From this $140
million, Anchorage made the remaining payment of $ 95 million to Woolworths. So effectively
Anchorage bought a $115 million business by paying just $10 million from its own side.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 19 © Kaplan Higher Education

 According to Forager, the next step for Anchorage was to plan for an initial public offering (IPO) for
Dick Smith. By doing a write-down on property, plant and equipment, it reduced its depreciation
charge by $15 million annually (Ryan, 2015). Lower depreciation means positive impact on profits.
It entered some onerous lease provisions to keep the depreciating related to its newly opened
stores out of its profit & loss statement. On the basis of sales generated in the discounted clearance
sales and the sales generated from new stores, the management of Dick Smith was able to forecast
a net profit of $ 40 million for 2014. On the basis of this higher projected net profit, it was able to
get Dick Smith a market capitalization of $520 million in the IPO. Anchorage capital sold its entire
stake in Dick Smith by September 2014.
 Inventory costs increased to $ 254 million by the end of 2014 as a larger amount of inventory had
to be bought because the old inventory was sold at heavily discounted prices in the clearance sale.
Cash flows were still kept positive by delaying payments of a large number of suppliers. By the end
of 2014, accounts payable to suppliers stood at $ 95 million.
The points raised in the article of Forage are valid. If the inventory that came with the acquisition of
Anchorage was so obsolete that Anchorage had to take a write-down immediately after acquiring the
business from Woolworths, then how was it able to sell this inventory so fast at above the written-down
value?
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 20 © Kaplan Higher Education

In its submission to the Senate Enquiry, Anchorage has mentioned that when it acquired Dick Smith from
Woolworths it was in very bad shape (Senate Inquiry Submission, 2016). Woolworth had reduced the
network of Dick Smith’s stores by 23% and profits were declining by several years. Anchorage also acquired
huge amount of obsolete inventory, given the write-down that it took on the inventory immediately after
the acquisition. It also took a write- down on plant, property and equipment. The question arises in one’s
mind that if the situation was so bad, why did Dick Smith pay the price of $115 million to Woolworths for
the acquisition? Also why did it immediately begin an expansion spree for Dick Smith?
In its submission to the Senate, Anchorage has stated that it owned and managed the company from the
time of acquisition in 2012 to September 2014. In the IPO in 2013, Anchorage gave up management control
by selling 80% of its stake in the company. In September 2014, Anchorage completely exited Dick Smith by
selling its last remaining shares. The question again comes to mind is that, did Anchorage expect to enable
the turnaround that Dick Smith required in just 1 year! In its submission to the Senate Enquiry it said that it
is a turnaround expert that buys struggling companies, turns them around, and then sells them at a profit.
In the essence of its submission to the Senate Inquiry, Anchorage has put the blame on the troubles of Dick
Smith and its subsequent placement in the hands of administrators on the management that was there,
after it exited the company. Nowhere in its submission, Anchorage addressed the issue of negative cash
flows from operations or the huge accounts payable that was due to suppliers
3(c )
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 21 © Kaplan Higher Education

The transformation and strategy initiatives taken by Anchorage Capital to turn around Dick Smith were not
effective and not sustainable. The strategy to open new stores to increase sales, in a scenario where same
store sales were declining, was a fallacious one (Jonathan & Peter, 2013). The right strategy would have
been to first identify the existing same stores that were bleeding heavy losses and decline in revenues and
shut them down. The next step would have been to focus on stores that were doing relatively well. The
third step should have been to control overhead expenses. The turnaround strategy did not focus on
cutting down overhead expenses of Dick Smith to the level of its competitors. Dick Smith had the highest
level of operating expenses in the consumer electronics retail industry.
The biggest flaw in the turnaround strategy of Anchorage Capital was that it failed to notice that rivals were
generating much higher revenues with lesser number of stores than Dick Smith. So the right strategy would
have been to focus on increasing the sales of existing stores instead of opening new stores or entering in
partnership with David Jones to manage its own stores or starting the new Move brand of stores. The
strategy of building up huge inventory to support the expansion was unsustainable as enough cash was not
being generated to pay back suppliers in time.
.
End of answers to Question 3(a)–(f)
END OF ASSIGNMENT 2
3 (d )
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 22 © Kaplan Higher Education

The statement, ‘Only a fool would buy shares in an IPO where a private equity fund is the exiting
vendor, ‘is misguided and will potentially result in poor investment decisions. Private Equity funds often
exit investments to create positive value on their investments. One of the common elements of business
models of private equity companies is to invest in companies for some time and then to exit their
investments by taking the company public by getting it listed (Pandey, 2017). If the company in which the
private equity firm is exiting the investment has good financial and operating and fundamentals then an
investor investing in the stock of the company would generate good returns. Take for instance the case of
Alibaba. Private equity firms such as Silver Lake exited significant portions of their investments at the time
of Alibaba’s IPO. Investors who bought shares of Alibaba at the time of its IPO, still made significant returns
(Merced, 2014). Actually many private equity firms are great turnaround experts. Many of them are good at
identifying businesses with good business models and then investing in them. The criterion of not buying
shares in an IPO where a private equity fund is the exiting vendor is a highly fallacious one. It will definitely
result in poor investment decisions.
3(e)
Looking at the shareholders register of Dick Smith it can be seen that a large number of
shareholders were institutional investors. These investors have the resources to do adequate due diligence
before taking the decision to invest in a share or not (Chandra, 2017). The IPO was oversubscribed. This
means that the bids received were more than the total number of shares that were offered in the IPO. The
IPO got listed at $2.20 per share and market capitalization of $ 520 million. The stock price of Dick Smith
hovered around $ 2.20 per share – the IPO listing price – till as late as 31st July, 2015. All these factors
clearly show that the market believed in the veracity of projected performance in the IPO prospectus of
Dick Smith, for long.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 23 © Kaplan Higher Education

3 (f)
‘The market gets it right nearly all of the time. But it was wrong on Dick Smith.’ Yes the market got
it absolutely wrong on Dick Smith. Sophisticated institutional investors failed in doing adequate due
diligence before investing in the stock of the company at the time of its IPO. They made the investment on
the basis of net profit posted by the company in the first quarter of 2013 and its projected profits in 2014.
They didn’t look at the cash flow situation of the company. A simple look at the cash flow statements of the
company and its balance sheet would have revealed that Dick Smith was generating positive cash flows
from its operations only by delaying payments to its major suppliers. Cash and cash equivalents of the
company steadily declined between 2013 and 2015. The price at which shares were subscribed in the IPO
was around 11 times its projected earnings for the next one year. This was a high price to pay for the shares
of a company that was struggling in a highly competitive market. The lesson from the case of Dick Smith is
that investors should look at profit & loss statement, balance sheet and cash flow , and not just the profit &
loss statement, before making the final decision of whether or not to invest in the shares of a company.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 24 © Kaplan Higher Education

References
Anchorage Capital Partners. (2013). Dick Smith Lists on ASX. Anchorage Capital Partners ,
http://www.anchoragecapital.com.au/news/dick-smith-posts-on-ask.
Blanchard, O. (2017). Macroeconomics. New York: Pearson.
Chandra, P. (2017). Investment Analysis and Portfolio Management. New York : Pearson.
Greenbalt, E. (2013). From $20m to $344m: Dick Smith for sale. Sydney Morning Herald ,
https://www.smh.com.au/business/markets/from-20m-to-344m-dick-smith-for-sale-20131114-2xizx.html.
Jonathan, B., & Peter, D. (2013). Corporate Finance (3rd Edition). Pearson.
Mason, M. (2013). Dick Smith's flat ASX debut. Sydney Morning Herald ,
https://www.smh.com.au/business/markets/dick-smiths-flat-asx-debut-20131204-2yq2a.html.
McGrathNicol. (2016). The Dick Smith Group: Report to Creditors pursuant to section 439 A of the
Corporations Act 2001. McGrathNicol , https://www.mcgrathnicol.com/app/uploads/DS-Australia-Report-
to-Creditors-13-July-2016-updated-15-July-2016.pdf.
Merced, M. (2014). Silver Lake Reaps a Golden Return on Its Alibaba Stake After the I.P.O. DealBook
, https://dealbook.nytimes.com/2014/09/21/silver-lake-reaps-a-golden-return-on-its-alibaba-stake-after-
the-i-p-o/.
Pandey, I. (2017). Financial Management. New Delhi : Vikas.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 25 © Kaplan Higher Education

Ryan, M. (2015). Dick Smith is the greatest private equity Heist of all time. Forager ,
https://foragerfunds.com/bristlemouth/dick-smith-is-the-greatest-private-equity-heist-of-all-time/.
Senate Inquiry Submission. (2016). Anchorage Capital Partners. Senate Inquiry Submission ,
http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Dick_Smith/Submissions.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 26 © Kaplan Higher Education