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UPDATE: Dick Smith couldn't find alternative funding in time

UPDATE: Dick Smith couldn't find alternative funding in time to buy inventory, banks pulled support

(Recasts with company, analyst comment)

By Jonathan Underhill

Jan. 5 (BusinessDesk) - Dick Smith Holdings, the consumer electronics chain with 393 stores in Australia and New Zealand, says it was unable to find alternative funding in time to order inventory in the short term after its banking syndicate withdrew support.

The company announced the appointment of McGrathNicol as voluntary administrator after the banks withdrew their support and sought to put Dick Smith into receivership, two years after it was taken public by buyout firm Anchorage Capital Partners.

"Sales and cash generation in December were below management expectations, continuing a trend experienced during 2Q 2016," chairman Rob Murray said in a statement to the ASX. While Dick Smith had explored alternative funding, "directors formed the view that 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."

Murray said the directors were confident about the long-term viability of the business but "have been unsuccessful in obtaining the necessary support of its banking syndicate to see it through this period." Dick Smith would work with McGrathNicol "to explore all options to allow the company to continue as a going concern," he said.

Company officials didn't immediately return calls. A notice to the Australian Securities & Investments Commission today said Jim Sarantinos, Ryan Eagle and James Stewart of Ferrier Hodgson had been appointed as receivers and managers pursuant to Dick Smith's general security deed.

The stock last traded at 35.5 Australian cents on the ASX, having tumbled 84 percent from the A$2.20-a-share Anchorage set for its initial public offering. It bought Dick Smith from Woolworths in 2012, in a deal reportedly valued at about A$115 million, before selling down in 2013 in an IPO that valued the company at A$520.3 million. Anchorage sold its remaining 20 percent in September 2014 for about A$2.22 a share.

The Australian newspaper reported today that among changes made by Anchorage was a rapid depletion of inventory, which then had to be rebuilt.

The stock was suspended today, having been halted yesterday pending an announcement on its funding position and debt financing covenants. That followed a A$60 million impairment against inventory, flagged on Nov. 30 with the possibility of more charges, which meant the retailer couldn't affirm its profit guidance. It cut prices in the run-up to Christmas to clear inventory, having struggled to compete against more profitable rivals such as JB Hi-Fi and Harvey Norman. Rivals are likely to benefit long term from Dick Smith's malaise, analysts said.

"There's going to be disruption but in the end there's going to be consolidation in the industry because none in the industry are making money," said Rob Mercer, head of private wealth research at Forsyth Barr. "They are all struggling to make an appropriate return. It has been a crowded marketplace for a long time. Any slashing of prices pre- and post-Christmas - that will eat margins, that's a short-term issue. But rivals should benefit from consolidation of the market."

Mercer said Forsyth Barr doesn't cover Dick Smith so he could only talk broadly about the industry. One issue for the company would be maintaining the confidence of suppliers, who in happier times might extend credit for up to 50 days. "That's where the banks are important to give them some assurances, to have suppliers continuing to be there," he said. New Zealand was a particularly tough market for electronics retailers, he said.

The retailer brought in external consultants after disappointing trading in October and November, and was underway with "significant marketing activity" to stimulate sales ahead of Christmas, the company said in November. At the time, managing director Nick Abboud said Dick Smith would maintain "flexibility on gross margin to reduce inventory and improve our debt position," a signal that more discounting is likely.

Dick Smith lifted sales by 7.5 percent to A$1.3 billion in 2015, although gross margin shrank to 24.8 percent from 25.1 percent, while profit fell about 10 percent, including one-time items, to A$37.9 million.


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