I find it interesting Mr West's articles appear to be never open for comments. I suggest maybe he would not like critical comment on the findings in his articles. Arguing that opening the articles to comment might lead to profane, abusive or similar comments would be unfair given every comment on a Fairfax article needs to be reviewed by a Fairfax moderator before being posted (so if anything slips through it is partially Fairfax's fault).
Whilst I think the article identifies the crux of the relevant issues it could have been better written. Also making the bold claim you solved a corporate collapse in 2 hours when the Administrators will take 6 months leaves you open to criticism when there are items in your article which are factually incorrect or may only be considering one possible reason for issues identified.
Based on the article:
• There are 6 administrators, not 4. He didn't account for the two specifically dealing with Dick Smith NZ
• It has been suggested the CFO was aware of the leave loading underpayments as early as Oct-15 and didn't do anything about it (or announce it). Understandable in those circumstances (including potential investigation) you might not want him to be around having access to the information systems
• They terminated 22 back office staff. The article seems to imply you would need these 22 staff to investigate the leave loading issue - I doubt it
• There is legitimate concern about the degree to which work undertaken by professional staff is the best use of their time (and creditor's money)
• The article doesn't consider that the VA needs to be increased to 6 months in length in order to hold the business together for a possible sale. If the VA wasn't extended a meeting to decide the fate of a 393 store retail network would be made on 9/2/16 (unless the meeting agreed to a 45 day extension). Arguably not enough time for the Receivers to sell the business as a going concern and the Administrators properly investigate the collapse. It could also allow landlords to step in and remove Dick Smith from their stores (due to contract ipso fcto clauses which are not enforceable in a VA). Whilst there is merit in arguing ipso facto clauses shouldn't be enforceable in a restructure outside of VA (which is current government policy to corporations law reform) the article's comment on unnecessarily prolonging the VA is disingenuous
• I agree there are issues about the fees charged by insolvency practitioners however one needs to account for the work being portfolio based (i.e. there are jobs undertaken where the fees aren't recovered but the work still needs to be done)
• The comment that DSH failed due to an inventory problem is likely the correct one but taking on additional debt in 2H16 trying to correct the inventory issues likely exacerbated the collapse
• The comment about the varying values of inventory by DSSH and WOW at the time of acquisition is comparing, to an extent, apples and oranges. The $246m inventory figure reported by WOW is a net figure which likely incorporates amounts from the $420m provision raised in Jan-12 for the business. The $371m figure reported by DSSH is the book value (i.e. before provisions). The article argues Anchorage inflated the inventory value on acquisition. This is a valid view point. It is also arguable that the provision held by WOW against the inventory was overly conservative (which is possible given the difference between realised GM% on Anchorage's inventory sales in FY13 (even when admittedly it was clearing out stock in a large Christmas sale in 2012) and historical sales in FY11 and FY12 is negligible when reviewing the Prospectus (page 57)
• There is also a similar argument that could be made with respect to the PPE balance differences between WOW and DSSH on acquisition
• It is not unusual for the auditor of a company to carry over from a previous business owner to a new business owner. It makes sense to the extent you don't need to pay for another audit firm to undertake a review of the internal control environment of a business before they are prepared to rely on the controls for audit purposes
• There is nothing unusual about the auditor undertaking the investigating accountant ('IA') report for an IPO (obviously this would involve two teams with different skill sets). The IA team would likely have better access to audit working papers and audit team members if they are from the same firm as the auditors than someone else doing the work. Because of this they can likely undertake the IA in a shorter period of time than someone else coming in with no knowledge of the business at all. I admit there is a potential argument that familiarity with the business could make an IA team blinkered to relevant issues
• It is difficult to assert the inventory balance at the prospectus time was 'window dressed' simply because of an assertion that it may have been window dressed 7 months before the balance sheet shown in the prospectus (and when there are other plausible reasons for the valuation of inventory at the date of acquisition as suggested above). It is also feasible that the make up of inventory at Dec-13 (one year after the acquisition) was materially different to that which was acquired in Nov-12 so is difficult to sustain an argument that an accounting of inventory one year ago had an impact on the listing inventory available to Dick Smith. The better argument is to ask whether or not DSH had an appropriate level of working capital on hand at the time of listing. Only the VA, Receivers, Anchorage and people involved with the float would have access to the information necessary to undertake this analysis and it would (likely) take more than two hours to assess. It also raises the issues as to why such information, in a highly cyclical business, does not need to be provided in a prospectus
• Arguably the inventory issue which led to Dick Smith's demise did not relate to how it accounted for inventory in Nov-12. More likely it has to do with the appropriateness of the inventory being bought in the lead-in to Christmas 2015 and that there was a likely mismatch between what was on hand and what customers wanted. It will be interesting to see the half year results presentations for JBH and HVN (particularly for business areas competing with DSH) to see how Christmas trading went for them and would likely show DSH chased after stock which could give them an (illusory) higher GM% which didn't eventuate because the stock didn't sell
• A relevant question is asked about Anchorage not recognising any value for the Dick Smith brand name on acquisition. Possibly this was done because such an intangible can't be amortised for tax purposes(and is not a valid accounting reason for not doing so)
• You can reconcile the differences in asset sale values between WOW ($115m) and DSSH ($261m) at Nov-12 because a part of the consideration under the initial sale contract for Dick Smith was for Anchorage to pay a portion of the future business sale proceeds to WOW as well as provision conservatism from WOW at the time
Surely more relevant questions should be asked about why the IPO process:
• only requires the disclosure of one balance sheet (but three years of income statements) making working cap. analysis impossible
• why there were no historical cash flow disclosures when WOW accounts show operating and investing cash flow information (but not financing)
• why no disclosures on working capital at listing is required (when any other sale avenue pursued by Anchorage would have required it)
• why financial accounts are only uploaded to the ASX after listing when such information is relevant to making an investment decision before listing
Maybe such questions and issues outlined above would have required more than 2 hours analysis to identify and consider?
IMHO a better analysis of the situation was undertaken by Trevor Sykes in the AFR a day earlier (this might be behind a paywall for some).
