prospect of no return from the receivership and liquidation of Dick Smith Holdings. Staff of the retailer will no doubt rely on the Federal Government’s Fair Entitlements Guarantee (FEG) scheme for payment of outstanding entitlements. Ferrier Hodgson, receivers for Dick Smith Holdings, claim they received 40 inquiries about the business before advertising for expressions of interest, but almost all would be ambulance chasers keen to dissect the details of the farcical public float of the retailer that virtually assured its financial collapse. No one would want to buy the entire business. An overseas buyer wanting to enter the Australian market at a relatively low entry cost would seem to offer the best prospect for sale of most of the business. However, the most likely scenario is that suitors would be interested in cherry-picking stores and possibly selling intact the fledgling Move business, the New Zealand store network and the online business. Any sale of Dick Smith Holdings and related entities will not realise anywhere near the $390 million of debt the retailer has run up since it was acquired debt free from Woolworths in 2012. Unsecured creditors are owed around $250 million and the chain is already under­stocked after its desperate pre­Christmas discount sales that aimed to generate cash and stave off the inevitable collapse just five days into the New Year. In a bid to provide some credibility to what is effectively a fire sale, Ferrier Hodgson has engaged Don Grover as interim CEO following the departure of Nick Abboud, whose continuing involvement with the retailer was untenable. Grover, a respected executive from Dymocks book stores and subsequently Fusion Retail Brands, will be working with Ferrier Hodgson on day to day management while a trade sale is pursued over the next month or two. But he will also begin closing stores. Anchors aweigh under Anchorage Capital Dick Smith Holdings expanded rapidly under both the initial Anchorage Capital Partners ownership and public ownership, adding 70 new stores and retaining 30 underperforming stores that former owner, Woolworths, had planned to close before the 2012 sale to the private equity firm. In any sale of Dick Smith Holdings, which had 393 stores when it was placed in receivership earlier this month, suitors will be keen to use the receivership process to offload dud stores. But Grover and Ferrier Hodgson will be shutting doors in any case to stem losses and to efficiently clear the already depleted stock levels. The Australian Securities and Investments Corporation has indicated it will investigate the collapse of Dick Smith Holdings once they receive a formal report from Ferrier Hodgson. The private equity firm, Anchorage Capital Partners, and the directors and senior management they installed at Dick Smith, are likely to face legal action over the collapse of the firm – but also over the extraordinary public float of the retailer for $520 million just 13 months after it was sold by Woolworths to Anchorage for between $94 million and $115 million. The exact price paid by Anchorage Capital Partners has been clouded by accounting procedures that state Dick Smith Holdings pay for all but $10 million of the acquisition price from its own earnings and debt facilities. Anchorage Capital Partners acquired the Dick Smith chain from Woolworths in 2012 with no debt, net tangible assets of $290 million and a streamlined store network after Woolworths itself chalked up $420 million in write downs on stock, store closures and restructuring. Anchorage Capital Partners charged up acquisition expenses, the costs of the listing on the Australian Stock Exchange in December 2013 along with management fees to the business, while using accounting provisions to unrealistically increase its value and inflate profits in order to make a public float look attractive to investors. Anchorage Capital Investors retained a 20 per cent stake in Dick Smith to give some credibility to the $2.20 a share float, but cashed out that holding at the earliest opportunity, while the financial reports generated by the company still looked rosy. The accounting processes used by the private equity firm, which effectively continued under public ownership, will be scrutinised by Ferrier Hodgson and ASIC. But they will also be monitored by duped investors, who see a class action against Anchorage Capital Partners as an option in pursuing the recovery of some of their outlaid funds. Dick Smith directors and management could also face legal action if it is established that the retailer continued to trade while insolvent, a very likely scenario given the level of debt and outstanding creditors. Legal action against directors and management may even be triggered by the sale of gift cards in the Christmas and New Year trading period that were unlikely to be honored, with the retailer quite possibly trading while insolvent and certainly in circumstances that made it an unacceptable practice to promote and sell the cards. South Australian Senator, Nick Xenophon, is pushing for an early ASIC intervention on the Dick Smith collapse and is pushing for a Senate Committee inquiry as well as legislation to address consumer losses on gift cards. Nick Abboud, Dick Smith’s now departed CEO, and Michael Potts, the retailer’s finance director, are facing a very nervous few months as Ferrier Hodgson unravels the retailer’s finances and lodges a report of its findingswith ASIC. Abboud is in the greatest danger of legal action by ASIC, as he was entangled in the listing of Dick Smith on the Australian Stock Exchange for $520 million, just a year after the private equity firm, Anchorage Capital Partners, acquired if from Woolworths for a fraction of that amount. Abboud continued to spruik about a positive future for Dick Smith right up until October 2015, when the retailer was forced to take a $60 million write­down on inventory, revise earnings forecasts and launch a massive discount sale in a bid to generate cash. Suppliers and financiers were already closing in on Dick Smith in October as speculation mounted about the extent of the retailer’s woes. To Abboud’s credit, it would appear that he did believe that Dick Smith had a promising future. Unlike Anchorage Capital Partners, he retained his shares in the company to the bitter end, effectively incurring a paper loss of more than $30 million from the high water mark on the value of the shares. Abboud’s position with Dick Smith was untenable and he now faces a nervous wait for Ferrier Hodgson’s evaluation of his actions and the extent to which he and the retailer’s directors provided full and proper disclosure to shareholders and the market on the financial position of the business. Shades of Sigma The reason Abboud and Potts face a nervous waiting period on legal action is the fact ASIC has demonstrated a tougher stance on financial reporting that does not provide shareholders with accurate reports that allow them to make informed investment decisions and to protect their capital. In 2015, ASIC has initiated legal action against Elmo de Alwis, the former CEO of Sigma Pharmaceuticals, along with the company’s finance director, Mark Smith, for misleading shareholders by falsifying accounts in 2009 and 2010. Alwis and Smith both pleaded guilty to falsifying the accounts, action they took to enhance the prospect of a $300 million capital raising. They overstated Sigma’s revenue, inventories, pre­payments and profit after tax in the company’s full­year accounts by a total of around $38 million for the year ending January 2010, which were lodged with ASIC and the Australian Stock Exchange, according to evidence in the County Court in Victoria in July 2015. Alwis and Smith admitted they provided false and misleading statements to Sigma’s auditors and the company’s board, as well as falsifying financial records in 2009. Sigma Pharmaceuticals was forced to pay shareholders almost $60 million in 2012 to settle a class action brought by investors who had relied on the company’s financial projections when deciding to participate in a $300 million capital raising in September 2009. Shareholders lost money when Sigma’s share price plunged in March 2010 when the company announced $424 million write­down that led to a $389 million loss for the 2010 financial year. Sigma was in a position to settle the class action, but legal action by Dick Smith investors over misleading financial reporting would be likely to target Anchorage Capital Partners, which packaged the retailer for a public listing in just 12 months, reaping a massive profit for an outlay from its own financial resources of just $10 million. In the Dick Smith case, Anchorage Capital Partners would appear to be the major culprit in creating a business structure and accounting procedures that would inevitably implode, apparently relying on shareholders capital to prop up profit calculations while extending debt from financiers and from creditors, including suppliers. Dick Smith directors called in McGrath Nicol as administrators on January 4 after entering a trading halt for its shares on the Stock Exchange. A syndicate of lenders to Dick Smith immediately appointed Ferrier Hodgson and forced Dick Smith Holdings and a number of related entities into receivership. In a statement to the Australian Stock Exchange announcing the appointment of McGrath Nicol on January 4, Rob Murray, chairman of Dick Smith Holdings, conceded the revenue forecasts had not been met. Murray said the retailer had considered alternate funding to allow the company to order new stock over the next four to six weeks, but it could not achieve that support quickly as a result of the banking syndicate refusing to extend further support. Broad ramifications Ferrier Hodgson is seeking expressions of interest for the sale of the business as a going concern by January 27. But even a successful sale is unlikely to return the $140 million owed to secured creditors, leaving unsecured creditors and shareholders without any recompense. The ramifications of the Dick Smith collapse are significant and could well entangle a number of advisory firms associated with the float, as well as the auditors, Deloitte, who do not appear to have flagged any concerns with financial practices. Deloitte could well be in the firing line if legal action proceeds and could potentially face censure from ASIC. The scale and contentious nature of the Dick Smith public float and collapse will put pressure on Ferrier Hodgson as receivers and on ASIC to take swift and comprehensive action in a collapse that has skittled virtually every related party and certainly made investors wary of private equity firms floating companies, even where the returns are more modest and realistic. Want more Inside Retail? Subscribe to Inside Retail Weekly now and get our premium print publication delivered to your door every week.