Financial Case Analysis Of Dick Smith Holdings: Kogan Essay

Question:

Discuss about the Financial Case Analysis of Dick Smith Holdings for Kogan.

Answer:

Introduction

This report aims to provide a broad view on the case study of Dick Smith brand which was liquidised on 25th July 2016 with a massive loss to the investors of the company (Chung, 2016). Though, the company was again purchased by Kogan.com at the same time with an undisclosed amount, it was speculated that the amount of the company in Australian security Exchange (ASX) listing was false and hyped. In this context, the study describes a brief history of ownership of the company Dick Smith brand. Furthermore, this research is focused on the evaluation of two different situations of the DSH’s valuation related to when it was offered to the public in the beginning and when the company was acquired by Anchorage Capital Partners from Woolworths in 2012 (Chung, 2016). In addition to this, the study also elaborates ethical issue faced by the top level management of the company when the company was listed in ASX in 2012 and by Anchorage Capital Partners pertaining to floating business.

A Brief summary of the Dick Smith brand

Dick Smith Company was commenced by Dick Smith in Atarmon, Sydney in 1968 under a rented car park space (Ryan, 2015). The company mainly focused to install car radios as a small business with just $610 as an initial capital. During 1970 to 80’s company was expanded by various product lines and ranges with around 20 stores in Australia. In 1980, 60% of the company’s shares holding by Dick Smith’s wife were sold to Woolworths. Moreover, remaining 40% of Dick Smith Company’s shares were fully owned by Woolworths in 1982 with a total worth of $25 million Woolworths purchased the Dick Smith brands whole company (Dick Smith- Annual Report, 2014). After that, Woolworths Company restructured Dick smith brand but then, closed up to 100 stores of the company and later on sold the company to Anchorage Capital Partner’s for $115 million. $20 millions were paid upfront by the company to purchase it from Woolworths (Dick Smith- Annual Report, 2014). The company appointed Nick Abboud as its chief executive in November, 2012. Besides that, it has been reported that just after a year, Dick Smith listed its shares on ASX with a capital floating of $520 million in December, 2013. In January 2016, company collapsed into voluntary administration in which McGrathNicol was appointed by company’s board, whereas investors appoint Ferrier Hodgson as a receiver (West, 2016). In present Scenario, Dick Smith brand is being owned by Kagon.Com from May 2016 that sold its product online only.

Assessment of the valuation of Dick Smith brand at the time of Initial Public Offering and when acquired by Anchorage capital partners

At the time of acquisition from Woolworths in November 2016, Anchorage capital partners purchased it by offering initial capital of $20 million and total amount of $115 million (Ong and Janda, 2016). However, it has been analysed that cash of Anchorage’s was only $20 million with no credits or loans from the market. In December 2013, the company floated Dick Smith Holding’s shares in Australian security exchange with market capitalisation of $520.3. From the Annual reports, it has also been realised that during this one year Dick Smith holding’s EBITDA was increased from $23million to $74.4 million (Dick Smith- Annual Report, 2014). On the contrary, it has also been examined that EBITDA growth was found on irregularities in inventory management. The written of values from assets was not explained properly such as in November 2012, written off value of plant and equipment was $54 million, whereas inventory which was booked as $312 million from $371 million having depreciation of $58 million (Anchorage Capital Partner, 2016). On the other hand, non-current provisions were written down by $8 million and all these adjustments were stated as fair value. Within 7 months, the inventory was declined by $171 million in 30th June, 2013. Due to plant and equipments written down in 2013, depreciation in 2014 was only of $10 million. These adjustments and representation could be the reason of growth in EBITDA in 2014 to $74.4 million swiftly (Dick Smith- Annual Report, 2014).

It has also been noticed that loans and borrowings of Dick Smith Holding in 2015 was increases with $70.5 million which was not presented in 2014 accounting books. Apart from this representation which was related to scrutiny and high level of debt, all the representation in the books of 2015 was normal and convincing (Ong and Janda, 2016). At the same time, when the case was examined closely, company did not indicate a sound business practice as debt ratio was recorded as 67% in year end of 2015 which is very risky and elevated. In 2015 ending, Dick Smith Holdings was not able to arrange its short-term debts due to dearth of working capital which was 1.23:1 (Dick Smith- Annual Report, 2014). In addition to this, inventory turnover ratio was examined as 2.9:10 which was not increased with a significant rate from 2014. The company was dysfunction due to no long service leave was granted in the year ending 2015. Meanwhile, announcement of failure in the operation and continuous breakdown of prices on November 2015 was made by top level management of the company, which added rapid decline in the prices of share in ASX due to Non-cash impairment in the inventory (Dick Smith- Annual Report, 2014). This whole incident above, further affected the share prices and performance of the company in the market at the end of the financial year 2015.

In the context of initial public offering, company’s profit and loss accounts were not audited and DSE source has also been added in the books to manipulate some of the values in the books. The company’s financial accounting recordings were not been audited from 2010-14 that created suspicion in the authorised and validity of the accounts (Chung, 2016). Therefore, it can be inferred that the dick smith company was not being operated with proper accounting standards and valid evidences to prove the true and fair view of the accounts recording in the last years of financial company 2015.

Ethical dilemmas of Anchorage Capital Partners and top level management of the company

Anchorage Capital Partner is a private equity firm situated in Australia which focuses on turnovers. The company took over Dick Smith brand from Woolworths in 2012 for $115 million as a total payment (The conversation, 2016). Dick smith holdings shares were floated in Australian security exchange worth $520 million. It has been analysed that the company had presented various illogical book recordings that created suspicion among stakeholders and investors. Some of the transactions such as writing off of $58 million from inventory as a fair value adjustment and over increase in EBITDA from $23.4 million to $74.4 million in the end of the financial year created some serious doubt on the fair and true view of the financial accounting in books of Dick Smith Holding (Anchorage Capital Partner, 2016). Amidst of all, anchorage capital partner is a profit earning company that is aimed to increase shareholder’s profit in any investment. Not only has the company its own shareholders but also in order to float a medium or small sized businesses, it is allowed to buy-ins and buyout that equity shares as a way of operation (The conversation, 2016). Furthermore, it has been seen that these private owned company deducts its asset strictly to increase the profit of the company.

Moreover, in case of directors and senior executives of Dick Smith holdings in which statement was made in the 2014- 2015 report and accounts that they are highly satisfied with the operational performance of the company and hope for the new investments which can enhance the future aspects of the company (Underhill, 2016). It can be analysed that directors, senior executives and other top management of the company were agreed to the financial record of the company as well as that explained it satisfied with the near future growth expectations. Likewise, it was stated in the Initial Public Offerings prospectus that in order to achieve a declination in the inventory, a sum of $2.5 million was spent by the company, which is not customary. It has also determined from the books of past financial information that financial recording of the company was also not authenticated as various figures was not clear and does not have any apt source. An unaudited P&L statement from 2010 to 2014 was also derived from unaudited accounts of DSE (Anchorage Capital Partner, 2016). Some of the major setbacks were writing off plant and equipments and exclusion of inventory impairment (Underhill, 2016). All of the above recordings were found in restructuring provisions, impairment losses and under acquisition balance sheet (Boyd, 2016). The information given in the annual reports were intended to influence the view of investor by presenting affirmative impression of the company.

In this process of liquidation of Dick Smith brand, Deloitte has played an imperative role as an accounts auditor. The company claims that its annual reports of 2015 were based on true and fair view statement which was compiled by the accounting standards. On the other hand, there was no information provided related to the future events and upcoming planning of the company. Substantially, after three days of all the statement shown in the annual reports subsidiaries holdings and perpetual limited were being ceased (Boyd, 2016). Not only this, National Australian Bank and HSBC Bank of Australia with major shareholders AMP were being ceased from shareholders in Dick Smith Holdings. Thus, suspicion over the auditors and top level management was considered strong and opportune. The company that claimed to be clean and with a true and fair view of books had recorded $338,000, for the audit service of $103,927.

Conclusion

From the above discussion, it can be inferred that Dick Smith Holding case has many folds that provides a clear view on the poor inventory management and some misrepresentation of financial accounting values that led the company’s dissolution in 2015. The company has a doubtful case even after, liquidation with the present owner of the company that is Kagon.com which has an online retailing in technology. It has been absorbed that company suddenly hyped its share prices within a year to $520 million from $115 million only in ASX. Poor inventory management and creating loans and borrowing as well as writing of assets with huge amount, unhinged the position of the company. In addition to this, it has also been concluded that as a profit earning organisation Anchorage capital partner cut off the assets to show profit to its shareholders. Top level management and auditors of the company were also involved in the misrepresentation of the figures as per their statement in the annual reports. Therefore, it can be said that Dick smith case was focused on the poor inventory management and misrepresentation of facts that led to the liquidation of the company.

References

Anchorage Capital Partner. 2016. Senate economics references committee inquiry in relation to the causes and consequences of the collapse of listed retailers in Australia [Online] Available at: [Accessed on: 28 August 2017].

Anchorage Capital Partners. 2017. [Online] Available at: [Accessed on: 28 August 2017].

Boyd, T. 2016. Dick Smith collapses a case study in electronics retailing. [Online] Available at: [Accessed on: 28 August 2017].

Chung, J. 2016. Dick Smith blasts private equity firm behind retailer’s stock market float. [Online] Available at: [Accessed on: 28 August 2017].

Dick Smith- Annual Report. 2014. [Online] Available at: [Accessed on: 28 August 2017].

Ong, T and Janda, M. 2016. Dick Smith enters receivership due to bad sales, banking woes. [Online] Available at: [Accessed on: 28 August 2017].

Ryan, M. 2015. Dick Smith is the Greatest Private Equity Heist of All Time. [Online] Available at: [Accessed on: 28 August 2017].

The conversation. 2016. How private equity won while other Dick Smith investors got burnt [Online] Available at: [Accessed on: 28 August 2017].

Underhill, J. 2016. Anchorage hyped Dick Smith IPO with 'gold talk'. [Online] Available at: [Accessed on: 28 August 2017].

West, M. 2016. Dick Smith float looks like window dressing. [Online] Available at: [Accessed on: 28 August 2017].

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