Investigators probing the accounts of Dick Smith are believed to be questioning the cost that Dick Smith was actually paying for house brand goods from Companies located in Asia.
They are also probing as to how Dick Smith came to be stocking, three years supply of Dick Smith branded batteries and other house brand products supplied by related Companies located in Hong Kong when they were placed into receivership.
Anchorage Capital Partners – the private equity firm that transformed Dick Smith from a $94 million, middle-market electronics chain into a $520 million stockmarket star – will have to front a Senate inquiry to answer questions over its role in the chain’s subsequent demise.
SA Senator Nick Xenophon claims it would be up to the Senate committee to decide who will appear before its inquiry into the collapse of listed retailers in Australia, but he expected Anchorage would be questioned.
“The collapse of Dick Smith has raised some fundamental questions about private equity and I’m sure private equity will defend its position vigorously,” Xenophon said.
Questions are also being raised about the actions of Dick Smith Chairman Rob Murray who in a filing with the Federal Court has failed to supply a detailed report relating to the final days at Dick Smith or how Dick Smith auditors Deloitte who were also the accountants for Woolworths the prior owners of Dick Smith failed to reveal shortfalls in the Companies accounts.
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| Dick Smith Chairman Rob Murray |
According to the last lot of known financials for the Company, operating cash flow for the last financial year ending June 28 was negative.
Records show that Dick Smith had $29.5 million cash, $53 million of receivables due, and payables totalling $228 million.
To date most of those suppliers owed money have not been paid.
Recently Ferrier Hodgson approached suppliers offering a bank guarantee to resupply Dick Smith, some vendors have taken up the offer however several brands including the likes of Samsung are refusing to give rebates for goods sold.
Recently The Federal Court judgment, granting Dick Smith’s administrators a six-month extension on holding its second creditors’ meeting.
According to court documents, the Dick Smith directors, including chairman Rob Murray and former chief executive Nick Abboud have failed to report shortcomings in the accounts, as a result of requests by the directors, the administrators have granted an extension to the directors until 29 January, 2016, however the directors have come back requesting a further extension until 19 February, 2016. The request is currently under consideration,” said the court document.
Currently various organisations including Ferrier Hodgson are feasting off the Dick Smith carcass.
As the company crashed, Dick Smith’s directors assigned no less than four partners of McGrathNichol as administrators. Its banks appointed three partners of Ferrier Hodgson as receivers, they charge out at a minimum of $600 an hour.
While they will get their fees suppliers have little chance of being paid.
Last week a smoking gun email found on the Computer of former Dick Smith Finance Director Michael Potts and addressed to former CEO Nick Aboud revealed a $2 million shortfall in annual leave entitlements.
McGrathNichol have already spent Dick Smith’s money to obtain a six-month extension from the Federal Court.
According to Jeff Knapp, accounting academic at UNSW who was called in by Fairfax Media to analyse the Dick Smith accounts.
Rather than charging $600 an hour per partner and taking six months, Knapp took two hours and 14 minutes.
Based on the fact that on November 30, 2015, Dick Smith Holdings announced a $60 million write-down of inventory which had become necessary. The share price tanked and the banks soon pulled the pin.
Dick Smith Holdings has failed because of an inventory problem; and this inventory problem can be traced to a time before the company was floated on the ASX Knapp concluded.
On November 26, 2012, Anchorage Capital, acquired the business from Woolworths using the entity Dick Smith Sub-Holdings Pty Ltd – but the financial reports of Woolworths and Sub-Holdings for June 2013 paint a very different picture about the acquisition.
The fine print in the 2013 report of Dick Smith Sub-Holdings show the inventories as having a book value of $371 million to Woolworths at the date of sale.
In contrast, the Woollies’ annual report records the inventories of subsidiaries as having a book value of $246 million, and these inventories include more than just the Dick Smith business.
According to Anchorage, it valued the inventories down by $58 million to record a cost of acquisition of $312 million. If the Woolworths number is correct, however, then Anchorage actually valued inventories upwards by at least $66 million.
It is a similar tale for plant equipment. According to Anchorage, it valued plant and equipment down by $55 million to record a cost of acquisition of $65 million.
Based on the Woolworths number though, there was actually a revaluation upwards of $14 million.
Fairfax Media point out that Deloitte Sydney acted as auditor for Woolworths and Anchorage for 2013 – not to mention, ahem, “Investigating Accountant” for the public float. If this Big Four audit firm, like its peers, was not beyond the law things would get very messy.
The Woolworths financial report also shows Dick Smith’s asset write-downs and restructuring costs of $420 million were booked for June 30, 2012.
It appears that when Anchorage came along it bumped the inventory and plant values back up and misleadingly disclosed it had done the opposite.
The most obvious thesis is that Anchorage “window-dressed” the inventory balance of Dick Smith when it acquired the business and the inventory remained window-dressed until the company failed.
This suggests the inventory balance shown in the prospectus for the float is false. If this is the case, those who bought shares in the float, mostly super funds, have been played for mugs Fairfax claimed.
The inventory saga came unstuck in 2015, long after the crew from Anchorage had pocketed hundreds of millions of dollars by tipping their shares into the superannuation system.
Nick Aboud the former CEO of Dick Smith is back working with the guys from Anchorage Capital however insiders in Mosman where he lives in a palatial waterside property, say that he has become deeply concerned with what ASIC and various investigators are discovering.
Several people have concluded that the statutory disclosures at the time of the acquisition simply do not reconcile – and there is therefore scope for regulators to act without waiting for six months.
Michael West writing for Fairfax Media claims that questions need to be answered about the actions of Dick Smith and Anchorage management.
Why does Anchorage extol the value of the Dick Smith brand in the prospectus when it has not recognised an asset for that brand at acquisition date?
Why would Woolworths sell the Dick Smith business for $115 million if Anchorage and its auditors, Deloitte, reckoned the fair value was $261 million?
Why did Woolworths earn another $118 million for “administration” costs in the Dick Smith changeover? Is there a conflict of interest when Deloitte, the auditor of Woolworths, is also appointed as Anchorage’s auditor and investigating accountant for the prospectus?