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UPDATE2: Dick Smith receivers hope to sell business

UPDATE2: Dick Smith receivers hope to sell business as going concern, say NZ unit profitable

(Recasts with comment from receivers Ferrier Hodgson)

By Jonathan Underhill

Jan. 5 (BusinessDesk) - The receivers of Dick Smith Holdings want to sell the consumer electronics chain with 393 stores in Australia and New Zealand as a going concern and say it will be business as usual while they consider restructuring and realisation options.

Jim Sarantinos, Ryan Eagle and James Stewart of Ferrier Hodgson were appointed as receivers by the retailer's banking syndicate after it appointed McGrathNicol as voluntary administrator. Stewart said it was "too early to clearly identify the primary causes of the company's current financial position and the reasons for its decline other than saying the business had become cash constrained in recent times."

"We are immediately calling for expressions of interest for a sale of the business as a going concern," Stewart said in a statement. The New Zealand business was profitable "and expected it would be attractive to potential buyers."

The retailer won't be completely business as usual in receivership as Stewart said outstanding gift vouchers won't be honoured and deposits won't be refunded. "Affected customers will become unsecured creditors of the group," he said.

Dick Smith's DSE (NZ) unit posted a profit of about $1.4 million in the 12 months ended June 28, down from about $3.7 million a year earlier. Sales fell to $179 million from $199 million.

The receivership comes just two years after the company 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 the voluntary administrator, McGrathNicol, "to explore all options to allow the company to continue as a going concern."

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 Holdings 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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