One of the biggest critics of failing electronics retailer Dick Smith has admonished investors for trusting in private equity to quickly buy and sell a quality business, but says vendor Anchorage Capital Partners will shrug off any hit to its reputation.
Forager Funds Management chief investment officer Steve Johnson said the quick turnaround of Dick Smith, which appointed receivers and voluntary administrators on Tuesday after it became overburdened with debt, should have sounded alarm bells for investors.
Woolworths fetched $94 million when it sold the chain to Anchorage in 2012. Anchorage itself only paid $20 million in cash, while Forager has claimed a cash balance that was transferred to Woolies meant the fund “only forked out $10 million”.
The private equity fund then sold Dick Smith in a $520 million initial public offer 15 months later.
“The big lesson here is that you can’t invest in a business just on the basis of one year’s numbers,” Mr Johnson told ABC radio on Wednesday. “You have to look over its history and you need to understand why the person is selling it is so keen to sell it to you.”
“I didn’t even look at the prospectus at the time of the float,” he said. “I just said I don’t want a piece of that particular situation because the incentives are all wrong and it just doesn’t smell right.”
Mr Johnson said that Anchorage’s reputation was “taking a battering” but said the firm would shrug it off because :investors have disappointingly short memories about these things.”
“I don’t know that it will be terminal,” he said. “The sharemarket has a very short memory and I think the next deal that will come along, people are going to look at it.”
Mr Johnson said he did not trust the argument from private equity that it is not in its long-term interests to “burn too many people” with poor quality floats because that would limit their ability to continue selling other businesses.
“Whilst I think there’s some truth to that, try and tell that to some 29-year-old kid who has got the ability or the potential to turn $20 million into $520 million and probably set themselves up for the rest of their life. I don’t think they’re going to be particularly concerned about the company’s reputation.”
Anchorage declined to comment.
Dick Smith’s 393 stores, which employ 3300 people, will operate as normal during an attempt to restructure the business and sell it as a going concern.
The chain owes its banks roughly $150 million, while creditors will attend their first meeting on January 14 in an attempt to recoup money owed to them.
Mr Johnson said the strategy under both previous owners, Woolworths and Anchorage, to beef up floor space and compete head on with electronics rivals Harvey Norman and JB HiFi was a “losing” one.
Dick Smith had sales of $1.3 billion last year. Mr Johnson suggested that a smaller electronics retailer with about $300 million in revenue that sold a narrower range of products might be able to survive.
“I don’t think you’re going to see Dick Smith in its current format again,” he said.