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Thanks Bensterz, agree awesome post, thanks for your awesome...

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20/01/16

12:54

Post #: 16832115
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Originally posted by bensterz ↑

No secret from my other posts that I've worked in insolvency before.

With the attention on this collapse hopefully something can be done to make an event like DSH less likely to happen in future. To my mind the prospectus process places too much emphasis on earnings and not enough on working capital and cash flow and needs to be amended to correct this. My concern is a number of people (and likely any potential Sentate inquiry) is going to go after the populist target (i.e. Anchorage making shed-loads of money from the DSH transaction) but overlook any critical analysis of what happened. Some questions / issues that might be relevant are:

• What was WOW thinking selling DSH to Anchorage on terms that allowed Dick Smith to buy itself? To me WOW shareholders should be pissed off with effectively underwriting Anchorage's windfall from the transaction. When Anchorage bought out the deferred consideration clause (which would have given WOW a share of any sale uplift on listing) did WOW not realise that Anchorage had employed, as part of the transaction, the very people who worked on the sale for them (and likely informed Anchorage what WOW thought the deferred consideration clause was worth)? Did WOW consider other options for dealing with surplus inventory DSH had from rapidly closing 70+ stores in FY12 and FY13 rather than giving Anchorage a free kick with an easy cash source (such as returning stock to suppliers, making Anchorage pay more than $21m for it etc.)?

• Did Anchorage have (or reasonably should have had) info relevant for the prospectus but didn't include it? I'd say they had historical cash flow info but used the excuse of WOW's central treasury function (i.e. inability to report historical financing cash flows) to exclude it. Anyone looking at WOW's annual reports at the time of the DSE sale can see WOW was able to identify the Operating CFs and Investing CFs of DSE for FY11 and FY12 and Anchorage should have been able to present this with their own FY13 data (and then explained Financing CFs weren't available due to WOW centrally administering debt facilities etc.) rather than providing no historical cash flow information at all. If they did present some historical CF data it would have been bleeding obvious Anchorage had run down DSE's working capital position prior to listing. Without any quantitative info in the prospectus about DSH's reasonable working capital needs throughout the year investors wouldn't have known if the inventory sell down by Anchorage in FY13 was the removal of surplus inventory or an unsustainable run-down requiring replenishment by incoming owners. I'm sure Anchorage would have spent considerable time analysing the working capital position of DSE before agreeing to the working capital adjustment clause in the sale contract with WOW

• Why doesn't the ASX require IPO companies to lodge copies of the audited financial statements with the ASX at the same time as they lodge their prospectus (and not when the company starts trading)? If it was easier for potential investors to access the FY13 Dick Smith Sub-holding accounts when the DSH prospectus was released (at the time you had to buy it from ASIC Companies register) they'd have (rightly) had questions about the investment thesis in DSH and the analysis everyone has seen Forager Funds Management do on the 2014 DSH accounts could have been done when the prospectus was released

• Do people find it suspicious that Anchorage sent a letter to DSH the day before the 2014 annual report release stating they believed in the prospects of the company and would hold their 20% shareholding at current prices only to sell out through a block trade one month later? Is it reasonable to conclude Anchorage knew such a letter would need to be released to the market and might be seen by some that Anchorage's 20% shareholding shouldn't be included in free-float calculations of DSH's share price (thereby inflating DSH's share price and providing an earlier exit opportunity)?

• How is the presentation of a pro-forma balance sheet at Jun-13 helpful in assessing the financial position of a retailer people are being asked to invest in less than one month before Christmas (note this is acceptable under current ASIC prospectus regulatory guidance)? Would Anchorage be happy with such due diligence as a buyer? I doubt it - I'd suggest they'd want to understand the normalised working capital position of the business throughout the year and see a pro-forma forecast balance sheet at Nov-13 (no doubt Anchorage's financial forecast model or other IPO analysis contained this information)

• Should ASIC require companies to prominently publish an ASIC notice in their prospectuses with suggested due diligence questions retail investors should consider when reading the prospectus (which could have prompted people to think whether or not it was a wise investment decision to buy shares in a company on a 13x earnings multiple based on earnings Anchorage had not yet delivered (i.e. absolutely no margin for safety factored into the share price))?

• Does relying solely on continuous disclosure work when a management team can present accounts at Jun-15 showing $41m net debt and before needing to report financials to the ASX again have maxed out its bank facilities owe another bank $20m for stock purchases prior to Christmas? Surely un-audited management account quarterly reporting would go some way to making it harder for management teams to bury their companies into debt burdens without shareholders (or other creditors for that matter) being the wiser. You'll only ever know continuous disclosure obligations have been breached in hindsight - surely something needs to be done to make this more difficult

• How can DSH acquire Mac1 Pty Ltd in Sep-14, not announce it to the market or make the necessary business combination note disclosure in its financial accounts and the auditor sign off on the accounts? [Happy to stand corrected on this point if I missed a disclosure or announcement]

• Why is it relevant information in a prospectus for a company to provide details of the financial covenants of its debt facilities but not relevant for the inclusion of the same data in annual financial account note disclosures? Could access to the NAB/HSBC facility financial covenants (as well as current interest rates on the facilities) allowed analysis of whether or not DSH could sustain $71m in debt from current operating levels?

If populist vitriol wins the day you'll end up with a few red faced PE guys in front of a senate inquiry on the evening news (and everyone feeling happy about them being grilled) but no effective means of trying to prevent it from happening again. People previously complained PE dumped businesses through the IPO market with unsustainable debt which would subsequently collapse and suggested PE needed to hold equity for longer. Anchorage held a 20% shareholding post listing, didn't use any debt while operating DSSH but this didn't stop people getting burned (though management decisions in 2015 could be blamed for the downfall as opposed to PE in this case).

People need to look at effective ways to change regulations and the fund raising process to make it more difficult for PE to make money as easily as they did in the DSH case and harder for management to fundamentally alter the financial position of a company without it being disclosed to the market (either voluntarily or through compulsion of quarterly reporting) in a timely manner.

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Thanks Bensterz, agree awesome post, thanks for your awesome contributions to these DSH threads.

DSH Price at posting: 35.5¢ Sentiment: None Disclosure: Held
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