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Surfstitch creditors to weigh Ezibuy deal

surfstitchNearly seven months after SurfStitch Group and SurfStitch Holdings went into voluntary administration, creditors of the embattled surfwear chain will decide the fate of the companies at the second meeting of creditors to be held on 4 April in Sydney.

In the lead up to the meeting, administrators John Park, Quentin Olde and Joseph Hansell of FTI Consulting have released a report outlining the merits of two separate proposals to repay creditors through a deed of company arrangement (DOCA).

The administrators are recommending creditors vote in support of the DOCA submitted by online and mail order retailer EziBuy, rather than the DOCA proposed by SurfStitch non-executive director Abigail Cheadle prior to the first creditors’ meeting last September, which has the backing of a number of creditors and shareholders, including general manager Justin Hillberg.

The administrators said the EziBuy DOCA would deliver the best overall return to creditors and carry a lower execution risk than either the Cheadle DOCA or liquidation.

Under the EziBuy proposal, SurfStitch would be acquired by EziBuy’s parent company, private equity firm Alceon, which has a  track record of successful retail turnarounds, including women’s apparel business, Noni B.

Ordinary creditors and employees would be paid in full within six to eight weeks and class action creditors would receive an initial cash dividend in the amount of $3.4 million to $4.3 million. Class action creditors would also be issued convertible notes which would convert to shares in the newly merged EziBuy/SurfStitch company, valued at between $6 million and $20 million. Current SurfStitch shareholders would be issued convertible notes which would convert to shares valued at between $1.5 million and $5 million.

This newly merged company would have an obligation to seek a “liquidity event” – either an IPO or trade sale – within the next three years, at which point shareholders could trade their shares on the ASX or receive a cash dividend, respectively.

Under the Cheadle proposal, SurfStitch would relist on the ASX and ordinary creditors and employees would be paid in full between six to eight weeks. Class action creditors would not receive a cash dividend, but they would be issued shares valued between $3.8 million and $6.1 million. Current shareholders would retain 47.85 per cent of the relisted group, worth between $6.2 million and $9.7 million.

EZIBUY

The administrators noted that either DOCA proposal would be preferable to liquidation, which would return cents on the dollar. But they said the EziBuy is preferable to the Cheadle proposal because all creditor groups – including class action participants – benefit more evenly from the deal and because the execution risk is lower.

For instance, the Cheadle deal would require the ASX to waive the requirement for shareholder approval to relist the company and provides no remedy to class action creditors if the ASX does not grant the waiver.

Glenn McGowan, partner and chief counsel at Gadens, which is representing shareholders in one of two class actions SurfStitch still faces, told Internet Retailing the EziBuy proposal was in part negotiated by the class action.

“If approved this will be one of the first times a class action has taken securities in partial settlement and an indication of what can be achieved in a co-operative environment where both the creditors and shareholders benefit,” he said.

While McGowan said Gadens has not yet advised class members how they should vote on 4 April, he seemed to agree with administrators that the EziBuy proposal is the best option.

“It is now evident that the financial performance of Surfstitch Australia has continued to deteriorate significantly, with falling working capital, worsening credit terms and management security.  The business is no longer sustainable in its own right. In the event of liquidation no value would be returned to shareholders,” he said.

“We did make attempts to negotiate better terms and more certainty from the Cheadle proposal but were unable to reach a satisfactory position, and as a result we will now recommend acceptance of the Ezibuy proposal.”

In addition to their recommendation to creditors, the administrators also reported on the potentially illegal behaviour of some former SurfStitch directors.

The administrators said one or more former directors of the group may have failed to continuously disclose price sensitive information to the ASX and take reasonable steps to keep adequate written financial records. They may have engaged in market misconduct and potentially insider trading.

The report will be lodged with ASIC in due course, the administrators said, where a separative investigation into the former directors is currently underway.

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