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'This could be the end of the road for Dick Smith,' says Forager Funds boss

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Pundits warn that troubled electronics retailer Dick Smith may struggle to re-finance its debt and is at risk of going under after the company voluntarily suspended its shares to buy time to shore up its balance sheet.

In an announcement to the Australian Securities Exchange on Monday the company said it had requested its shares be placed in a trading halt pending an announcement about its "funding position and debt financing covenants".

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Dick Smith edging closer to closure

Electronics retailer Dick Smith is struggling to refinance its debt and is at risk of going under according to analysts. (Vision: Seven News)

Analysts, who declined to be quoted, told Fairfax Media the reference to "debt financing covenants" in Monday's ASX announcement indicated that expected write-downs may be even larger than already flagged. 

"The announcement is very negative. This could be the end of the road for Dick Smith," Forager Funds chief investment officer Steve Johnson said.

"I wouldn't be surprised if the company is not able to resume trading on Wednesday and instead seeks an extension of time to continue trying to re-finance its debt". 

Dick Smith director of investor relations David Cooke told Fairfax Media the company intended to resume trading by Wednesday.


Mr Johnson said a successful recapitalisation was possible but the announcement raised worries that the business may not be a going concern. 

Receivership possible

"Receivership could be round the corner," he said. "Dick Smith is a very niche business and it is getting out-competed by Harvey Norman and JB Hi-Fi." 

The breadth of the company's woes became public when it abandoned its profit guidance at the end of November and slashed the value of inventories by 20 per cent – a $60 million write-off.

The company's shares then plunged by as much as 70 per cent, hitting 20¢ at one point, nudging the company out of the S&P/ASX200 in early December. The stock is down 83 per cent over the past 12 months. 

Investors paid $2.20 a share when private equity firm Anchorage Capital Partners floated the company for $520 million in December 2013. The stock traded as high as $2.40 in January 2014. 

In an October 2015 blog post titled Dick Smith is the greatest private equity heist of all time Forager Funds analyst Matt Ryan outlined how Anchorage Capital stripped inventory from the retailer before bringing it back to the public market. Forager Funds has never owned shares in Dick Smith Holdings. Anchorage Capital declined to comment. 

The combination of weak sales and weak balance sheet could prove lethal.

Steve Johnson

Anchorage Capital 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. 

In November Fairfax Media reported Forager's view that Dick Smith was struggling to pay suppliers and could become insolvent if sales did not improve over Christmas

Heavy discounting

The company soon after opened the doors for a go-for-broke sale that included heavy discounting in the month leading up to Christmas.

Deutsche Bank retail analysts told clients most of the discounting appeared to be focused on Dick Smith's private-label products, especially accessories for old models of Samsung and Apple smartphones, suggesting that was the source of its inventory problems.

Some private-label products were discounted by up to 97.5 per cent, while Apple and Fitbit products were only 10 per cent off and laptops 10 per cent to 20 per cent off.

Deutsche Bank analysts claimed the discounts were "not unusual", nevertheless Deutsche Bank asset managers reduced their shareholding in the company from 8 per cent to 5.8 per cent. 

Mr Johnson said Anchorage Capital brought Dick Smith back to the public market with a weak balance sheet that "looked ok" because the company was not laden with debt.

"But it had a serious lack of inventory. Replenishing stock meant taking on debt and pushing suppliers too hard," he said. 

"If sales had been performing strongly, the company may have been able to pull that off, but the combination of weak sales and weak balance sheet could prove lethal." 

"In recent weeks we have heard reports of suppliers worried about getting paid demanding cash on delivery and this has only exacerbated Dick Smiths' balance sheet woes."

In December, Dick Smith chairman Rob Murray backed chief executive Nick Abboud in response to reports he was set to be replaced

Company founder Dick Smith has not owned shares in the company since he sold it to Woolworths for about $25 million in 1982.

The largest shareholder, says the latest available Bloomberg data, is US and Bermuda based FIL Limited.