Dick Smith appoints McGrath Nicol as administrator

Australia's oldest electronics retailer Dick Smith has conceded its desperate pre-Christmas sale has failed to save it from the clutches of nervous bankers, who have forced it in to receivership owing roughly $150 million.

The embattled business revealed on Tuesday morning that it had called in advisory firm McGrath Nicol as voluntary administrator overnight and that its banking syndicate, led by National Australia Bank and HSBC, had subsequently appointed Ferrier Hodgson as receiver. 

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This followed the company requesting a two-day share trading halt on Monday pending an announcement about its "funding position and debt financing covenants". 

Dick Smith chairman Rob Murray said a go-for-broke December discount sale, previously labelled "suicidal" by rival retailer Harvey Norman chairman Gerry Harvey, had not generated as much cash as management had expected, leaving the board with no option but voluntary administration. 

Dick Smith’s go-for-broke December discount sale did not generate as much cash as expected.
Dick Smith’s go-for-broke December discount sale did not generate as much cash as expected. Photo: Josh Robenstone

"Any success in obtaining alternative funding would not have been sufficiently timely to support short-term funding requirements and allow the company to order required inventory during the next four to six weeks," Mr Murray said in a statement to the ASX. 

"The directors have been unsuccessful in obtaining the necessary support of its banking syndicate to see it through this period ... without this support, there is no option other than to appoint a voluntary administrator." 

Ferrier Hodgson partner James Stewart said the receiver would continue to pay Dick Smith's 3300 employees and the chain's 393 stores would operate as normal while it restructured the company and tried to sell it.  

The New Zealand arm of the business was profitable and likely to be attractive to buyers, he said. 

Morgan Stanley analyst Thomas Kierath said Harvey Norman and JB Hi-Fi could earn up to $200 million each in extra sales ...
Morgan Stanley analyst Thomas Kierath said Harvey Norman and JB Hi-Fi could earn up to $200 million each in extra sales from the demise of Dick Smith. Photo: Glenn Hunt

Administrators McGrath Nicol called the first creditors' meeting to be held in Sydney at midday on January 14. 

"Information on the meeting would be forwarded to all known creditors by post as soon as possible and a creditor hotline has been established with Link Market Services," McGrath Nicol partner Joseph Hayes said. 

In addition to the ASX-listed parent company Dick Smith Holdings another eight associated subsidiaries have also been placed in administration, including Dick Smith Wholesale, Dick Smith Franchising, and the Dick Smith Electronics Staff Superannuation Fund. 

None of the key parties – Dick Smith, Ferrier Hodgson, or its administrator McGrath Nicol – would confirm on Tuesday exactly how much was owed. 

Sources close to the matter, who did not wish to be named, told Fairfax Media the ASX-listed Dick Smith Holdings owed "at least $140 million" to its banking partners with other debts owed to other creditors. 

According to the company's 2015 annual report, at June 30 Dick Smith Holdings had drawn just $70 million of its $135 million in unsecured loan facilities.  

Mr Stewart said it was too early to tell what caused Dick Smith's current dire financial situation, other than noting it had become "cash constrained in recent times". 

In its statement to the ASX on Monday Dick Smith indicated it had requested a trading halt pending an announcement about its "funding position and debt financing covenants", indicating it was at risk of, or may have already, breached its covenants.

Debt covenants are special conditions placed on a loan. The details of Dick Smith's debt covenants are unknown. Typically business banking syndicates require that the debt not exceed a particular ratio of earnings before interest, tax, depreciation and amortisation. For retailers an extra condition is often applied that includes fixed costs, such as rent, in addition to EBITDA.

"The timing of Dick Smith's collapse is certainly opportune for the banks," Forager Funds boss Steve Johnson said.

"I would be very surprised if the cash position of Dick Smith is not better today than it has been for sometime. The tills have been ringing through a massive Christmas sale and gift certificates have been sold but not redeemed yet."

NAB and HSBC both declined to comment. 

The appointment of  administrators follows two painful earnings downgrades in the past six months and a $60 million inventory write-off that sent shares as low as 20¢ last month. 

The shares last traded at 35.5¢ each, down nearly 84 per cent since investors paid $2.20 a share when private equity firm Anchorage Capital floated the company in December 2013. 

Anchorage Capital Partners bought Dick Smith from Australian retail giant Woolworths in a deal worth $115 million in 2011 and floated it with a market capitalisation of $520 million less than two years later. 

The company's eponymous founder, entrepeneur Dick Smith, labelled the float price "clearly ridiculous". 

Mr Smith has not owned any shares in the company since selling out to Woolworths in 1982. However he was still proud of the business that made him a household name and hopeful it could survive. 

Dick Smith's largest shareholder, with 12.12 per cent, is United States firm Fidelity Worldwide Investments. 

Chief executive Nick Abboud is the second largest shareholder in the company. His 15.3 million shares were worth $5.4 million when the company entered administration, compared with $34 million at the time of the float.