Dick Smith float looks like window dressing

"There's an old saying in Tennessee — I know it's in Texas, probably in Tennessee — that says, fool me once — shame on — shame on you. You fool me, you can't get fooled again" - George W Bush

Yes you can.

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Dick Smith employees 'a significant group of creditors'

Dick Smith administrators address creditors at a meeting in Sydney.

They alighted on the carcass of Dick Smith Holdings en masse. Never would it suffice to appoint less than seven corporate undertakers to preside over the tasty remains of this tormented retailer.

As the company crashed, Dick Smith's directors assigned no less than four partners of McGrathNichol​ as administrators. Its banks appointed three partners of Ferrier Hodgson as receivers.

Rebates might be part of doing business in the retail sector, but as the Dick Smith collapse and Tesco charges show, we ...
Rebates might be part of doing business in the retail sector, but as the Dick Smith collapse and Tesco charges show, we need to know much more about how they work.  Photo: Edwina Pickles

All seven will covet the interests of the directors and banks which appointed them while small creditors with their unredeemed Dick Smith Christmas gift cards, will have no voice.

They will peer from the hazy distance as the insolvency operators and their teeming lawyers enjoy Dick Smith's biggest ever clearance sale.


News this week that Ferrier Hodgson had found a $2 million shortfall in annual leave entitlements and so removed the chief financial officer and 22 office jobs is par for the course. Out go these workers, tainted, and muzzled by confidentiality agreements. In come Ferrier juniors, charged out at five times the cost.

Creditors meeting delayed

Delays and high secrecy are standard operating procedure in insolvency. The lads from McGrathNichol have already spent Dick Smith's money to obtain a six month extension from the Federal Court.

Illustration: Michael Mucci
Illustration: Michael Mucci 

The second meeting of creditors is delayed till August. Seasons will pass before the beleaguered suppliers, shareholders, gift card holders and other creditors are told what is going on.

Devilishly complicated business this, lament the corporate undertakers. It takes time to achieve the right outcome, they claim, as the clock ticks and their millions in fees mount up. They charge by the hour, after all.

Rather than waiting another six months for the creditors report, we called Jeff Knapp, accounting academic at UNSW, to help put together the Knapp/West Truly Independent Report to Creditors of Dick Smith.

Rather than charging $600 an hour per partner and taking six months, the Knapp/West partnership took two hours and 14 minutes over the telephone; that is, at least five months, 29 days, 21 hours and 46 minutes less than the McGrath/Ferrier caper. And it's free.

Why would Woolworths sell the Dick Smith business for $115 million if Anchorage and its auditors, Deloitte, reckoned the fair value was $261 million?

Skipping our introductory letter to creditors of Dick Smith, which begins "Dear poor, unwitting creditors, you have been hornswoggled once and are now being hornswoggled again …," we will proceed directly to the heart of the thing.

Inventory at heart of issues

On November 30, 2015, Dick Smith Holdings announced a $60 million write-down of inventory had become necessary. The share price tanked and the banks soon pulled the pin.

Dick Smith Holdings has failed because of an inventory problem; and this inventory problem can be traced to a time before the company was floated on the ASX.

On November 26, 2012, Anchorage Capital, a slick private equity mob, acquired the business from Woolworths using the entity Dick Smith Sub-Holdings Pty Ltd – but the financial reports of Woolworths and Sub-Holdings for June 2013 paint a very different picture about the acquisition.

The fine print in the 2013 report of Dick Smith Sub-Holdings show the inventories as having a book value of $371 million to Woolworths at the date of sale.

In contrast, the Woolies' annual report records the inventories of subsidiaries as having a book value of $246 million, and these inventories include more than just the Dick Smith business.

According to Anchorage, it valued the inventories down by $58 million to record a cost of acquisition of $312 million. If the Woolworths number is correct, however, then Anchorage actually valued inventories upwards by at least $66 million.

It is a similar tale for plant equipment. According to Anchorage, it valued plant and equipment down by $55 million to record a cost of acquisition of $65 million.

Based on the Woolworths number though, there was actually a revaluation upwards of $14 million.

Was this window-dressing?

Deloitte Sydney acted as auditor for Woolworths and Anchorage for 2013 – not to mention, ahem, "Investigating Accountant" for the public float. If this Big Four audit firm, like its peers, was not beyond the law things would get very messy.

The Woolworths financial report also shows Dick Smith's asset write-downs and restructuring costs of $420 million were booked for June 30, 2012.

It appears that when Anchorage came along it bumped the inventory and plant values back up and misleadingly disclosed it had done the opposite.

The most obvious thesis is that Anchorage "window-dressed" the inventory balance of Dick Smith when it acquired the business and the inventory remained window-dressed until the company failed.

This suggests the inventory balance shown in the prospectus for the float is false. If this is the case, those who bought shares in the float, mostly super funds, have been played for mugs.

The inventory caper only came unstuck in 2015, long after the crew from Anchorage had socked away hundreds of millions of dollars by tipping their shares into the superannuation system.

That this inventory caper was afoot from the very beginning seems clear – the statutory disclosures at the time of the acquisition simply do not reconcile – and there is therefore scope for regulators to act without waiting for six months.

Questions need to be answered

There are other questions though which need to be answered. Why does Anchorage extol the value of the Dick Smith brand in the prospectus when it has not recognised an asset for that brand at acquisition date? 

Why would Woolworths sell the Dick Smith business for $115 million if Anchorage and its auditors, Deloitte, reckoned the fair value was $261 million? 

Why did Woolworths earn another $118 million for "administration" costs in the Dick Smith changeover?  Is there a conflict of interest when Deloitte, the auditor of Woolworths, is also appointed as Anchorage's auditor and investigating accountant for the prospectus? 

Dick Smith creditors and shareholders have been wheedled once by sharp private equity types and their merchant bankers from Macquarie and Goldman.

Thanks to a rapacious insolvency profession – and its overkill on managing what is a basic consumer electrical retailer – they will soon be wheedled again.