Dick Smith: from icon to impasse
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The sorry story of electronics company Dick Smith is a reminder of the destructive circuitry of capitalism.
Corporate takeovers, private equity parasitism, employee underpayments and customer rip-offs all get a guernsey.
In 1968, a relatively small local capitalist Dick Smith founded the eponymous electronics retailer Dick Smith Electronics as a small car radio installation business in Sydney. By skilful marketing and the celebrity-like promotion of his own charismatic identity, Smith quickly expanded the business and established a leading position in the retail electronics industry.
The giant Woolworths supermarket corporation took over the company in 1982, sold by Smith for $22 million. Although no longer owned by Smith, the business retained his name in the business title along with a profile graphic of the founder.
Woolworths is a publicly-listed Australian company. As of 2015, its top five shareholders were the entities common to so many of Australia’s publicly listed companies, controlling some 40% of its shares:
Rank Name Number held %IC
1 HSBC Custody Nominees (Australia) Limited 207,407,841 16.37
2 JP Morgan Nominees Australia Limited 128,923,967 10.18
3 National Nominees Limited 123,973,450 9.79
4 Citicorp Nominees Pty Limited 43,557,520 3.44
5 BNP Paribas Noms Pty Ltd <DRP> 35,391,163 2.79
How much of this controlling capital is Australian, and how much is foreign, is difficult to discern. What is clear is that in the three decades since the Woolworths takeover, Dick Smith Electronics had started to short-circuit. It was no longer the cash cow that Woolworths required it to be. Woolworths conducted a review of Dick Smith operations in 2011 and announced in January 2012 the closure of up to 100 Dick Smith stores. It then put the company on the market.
Enter Private Equity
Sydney-based private equity firm Anchorage, founded by local capitalist directors Phillip Cave and Daniel Wong, announced on September 27 2012 that it would purchase Dick Smith Electronics.
Anchorage’s method of acquisition shows just how the rules of the game are rigged to favour finance capital. Investigations by Forager Funds’ Matt Ryan reveal that Anchorage invested just $10m of its own capital in the $115m purchase. The following excerpts are from Ryan’s article (which is well worth a read here: https://foragerfunds.com/bristlemouth/dick-smith-is-the-greatest-private-equity-heist-of-all-time/ ).
Want to know how to turn $10m in to $520m in less than two years? Just ask Anchorage Capital. The private equity group has pulled off one of the great heists of all time, using all the tricks in the book, to turn Dick Smith from a $10m piece of mutton into a $520m lamb.
Firstly, Anchorage set up a holding company called Dick Smith Sub-holdings that they used to acquire the Dick Smith business from Woolworths. They say they paid $115m, but the notes to the 2014 accounts show that only $20m in cash was initially paid by the holding company.
It doesn’t look like they even paid that much, because they acquired the Dick Smith business with $12.6m in cash already in it. Dick Smith Sub-holdings was formed with only $10m of issued capital and no debt, and that is most likely Anchorage’s actual cash commitment.
So if Woolworths got paid $115m and Anchorage only forked out $10m, where did the rest of the cash come from?
The answer is the Dick Smith balance sheet, and this is always the first chapter in the private equity playbook: pull out the maximum amount of cash as quickly as you can….
The cash flow statement shows that Anchorage then used the $117m operating cash flow of the business to fund the outstanding payments to Woolworths, rather than funding it from their own pockets…
So, perfectly legally, Anchorage bought a company using that company’s own cash and assets with a consequent weakening of Dick Smith’s operating ability.
The next step in the “greatest private equity heist of all time” was to take Dick Smith public, that is to proceed with a capital-raising via listing the company on the Australian Stock Exchange by offering shares in the company to prospective investors.
3148 shareholders bought into the company. Around half of those were “Mum and Dad” investors with up to 5000 shares each. These comprised a meagre 1.7% of total shares. 72 shareholders, or less than 2.5% of shareholders, controlled nearly 88% of shares with 100,000 or more each. The top five shareholders were the usual suspects:
Rank Name Number held %IC
1 J P MORGAN NOMINEES AUSTRALIA LIMITED 57,141,658 24.16
2 NATIONAL NOMINEES LIMITED 36,176,951 15.30
3 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 34,671,336 14.66
4 CITICORP NOMINEES PTY LIMITED 15,994,889 6.76
5 LMA INVESTMENTS PTY LIMITED 15,330,639 6.48
Anchorage netted a cool $520m from its sale of shares in Dick Smith walking away from the company with a more than 50 times return on its original $10m investment. As Ryan concludes, “Private equity are renowned for pulling off deals, but if there’s a better one than this I haven’t heard about it.”
Despite an upbeat 2015 Annual report, Dick Smith was sliding into trading oblivion. Even so, the Chairman’s message to investors contained no foretaste of what was to come. “The transition from private ownership to a highly profitable listed consumer electronics company is not without its challenges,” he wrote. Nevertheless, he stated, “We are confident that our Company will achieve further growth in 2016, facilitating the appropriate rewards for your continued loyalty.”
Has loyalty ever been such a one way street? In this case, the only possible destination on that street was the dead end of bankruptcy and receivership.
Customers and employees dudded
Perhaps we need not be too worried about the losses of Dick Smith’s major shareholders. “Mum and Dad” shareholders, maybe, although their motivation is also to profit from the labour power of others.
More deserving of sympathy are the customers and employees. The latter are legally secured creditors, the former are not. Secured creditors have certain rights protected by law.
Unfortunately for Dick Smith workers, the entitlements that normally accrue when a company goes into receivership, such as long service leave payouts, are not all that are owing. Receivers Ferrier Hodgson discovered annual leave underpayments to some 3200 Dick Smith employees going back to 2010, when the company was run by Woolworths, and worth around $2 million. How much of this will ever be recovered is anyone’s guess.
What might also never be recovered is the reputation of the right wing Shop Distributive and Allied Employees Association (SDA), the union covering the workers.
“The underpayment of entitlements appears to reflect an incorrect application of the relevant industrial award,” said a spokesperson for the receivers. The receivers alerted the Fair Work Ombudsman and the SDA.
It beggars belief that out of the thousands of Dick Smith workers in the SDA, none had had their pay slips checked by the union, and that underpayments to so many members over so many years had completely escaped the notice of the union. Perhaps the SDA would do better to outsource all of its work to receivers!
In an even worse position are those members of the public who had purchased Dick Smith gift cards. They are at the bottom of the food chain and unlikely to ever be recompensed.
The mood of these unsecured creditors can be glimpsed on the Dick Smith Facebook page. The page boasts 145,101 Likes, testimony to its iconic status among tech savvy customers. It has not had any posts since a January 17 Open Letter to Customers. However, customer comments are devastating. These three are typical:
Lee Clear: I purchased a $200 gift card from a Dick Smith store on 21st December which is now worthless...you would have had a fair idea that you were going into receivership and you were still happy to take my cash...disgraceful Dick Smith...disgraceful
Andrew Nathan: How can you call it "business as usual" when you will not honour Gift Cards, Refund Faulty units and have a basic lack of care for your customers. It is a discrace, not to mention a slap in the face to the Australian consumer. I feel for your staff, who have to lie to customers to make sales.
Alex Caraco: This is a letter in poor taste until all customers are repaid their gift cards or goods delivered I will never come to a Dick Smith store again the receiver liquidation rules In Australia are worded in favour of banks not customers.
Turn around or run aground
Anchorage has boasted that it is a “turn around” specialist, capable of improving the performance of ailing companies by measures including “a heavy focus on improving organisation culture, controls and performance” and “reduction in cost of doing business”.
In the case of Dick Smith, it has been more a case of run aground than turn around.
It is verification, if it were ever needed, that the loyalty of finance capital is entirely to itself.
It is verification, and this is surely no longer in doubt, that finance capital is parasitic and destructive.
It is verification of Marx’s observation that “one capitalist kills many”, that the economic laws of motion of capitalism and imperialism have nothing to offer our collective future.
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