The year is 1999 and my parents have informed me that I will no longer be “spending their money”. This is their no-so-subtle way of telling me that I need to get a job if I want to keep doing the things I’m doing, like upgrading my PC every 6 months. I’ve already heard horror stories of my mates working at McDonalds and other, typical first time job places so I’ve set my sights elsewhere. To my surprise the first Dick Smith Electronics store I put my resume in at calls me back right away. No less than a month (and a few questionable training videos later) I’m out on the sales floor, a place I’d come back to routinely for another 6 years.
So suffice to say that I have something of a soft spot for the electronics retailer, even long after it dropped the iconic branding and reputation for being the place to get electronic components and kits. Of course I had long knew about the troubles the company was facing, partly from online but also from their less-than-stellar own product brand. Things were looking up in recent times after they were bought out from Woolworths and then refloated on the ASX however it turns out that might have been the first turn in its current demise.
As it turns out the buyout by Anchorage Capital, a private equity firm, was a carefully constructed scheme to buy DSE for a song and then reap themselves a healthy profit. The whole blog is worth reading in its entirety however the pertinent details are thus. Anchorage “purchased” DSE for a total of $115 million however only $10 million of that was financed with actual cash. The rest was derived from writing down their stock holdings and then selling them off at fire sale prices. This generated them a huge operating cash flow which they then used to pay back the outstanding amounts to Woolworths. Then, prior to relisting DSE on the stock exchange, they used the previous write downs and projections from the clearance sales to forecast a believeable profit for the coming years. This is what allowed them to list DSE for some $525 million, all of which they were able to receive after selling all their shares in September 2014.
This, of course, didn’t leave the company in the greatest state something which was reflected in the share price which meandered around $2 until late last year. Then after their FY2014 earnings failed to meet expectations their share price began to tumble, losing almost 90% of its value. In a desperate attempt to stem the tide DSE then engaged in what many called a “suicidal” sale of their current inventory, hoping to win enough business during the christmas period in order to stay afloat. This, unfortunately, did not work and today they have requested that the ASX put a trading halt on their shares while they look to restructure their debt obligations.
Given this recent turmoil it’s going to be incredibly hard for DSE to find a willing debtor to pull them out of this grief. Previously DSE looked strong due to its lack of debt however the fire sales that Anchorage engaged in to pay back Woolworths left the company without the inventory it needed to continue business. This meant taking on debt in order to keep suppliers on the books, something which is fine if the sales are there to support it. However, as their fire sale over christmas has shown, they simply aren’t making the kinds of sales required to support that way of doing business and so we find ourselves in this current situation.
It’s a prime example of how corporate raiders can carve up a company for a large short term gain that cripples it in the long term. DSE always struggled against the bigger retail giants, especially when it branched out into their territory in early the early 2000s, but it was at least sustainable. Now it’s quite likely that DSE will end up in receivership, unable to finance its debt obligations leaving it incapable of continuing business. For a former employee it’s a sad thing to see happen and I sincerely hope I’m wrong about them being able to restructure their debt.