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SurfStitch supporters say turnaround still possible

surfstitchSurfStitch co-founder Lex Pedersen says the administration process has inflicted unnecessary damage on the embattled surfwear business, but he believes a new deed of company arrangement (DOCA) proposed by non-executive director Abigail Cheadle on Tuesday could revitalise the brand.

“If it is set on that path, I am willing to reinvest in that. The turnaround is possible. It just needs to happen quickly – enough is enough,” Pedersen told Inside Retail.

Pedersen acknowledged that SurfStitch was not exactly thriving when directors appointed John Park, Quentin Olde and Joseph Hansell of FTI Consulting as administrators in August last year, but he maintains the outcome could have been avoided.

“The business was clearly under pressure – there were fires on several fronts – but I do believe that administration could have been avoided. It’s crippling for the business and needs to end immediately.”

Cheadle noted that SurfStitch was solvent when the board appointed administrators, a decision she didn’t support at the time.

“All I can say is that [SurfStitch chairman] Sam Weiss, [former CEO] Mike Sonand and [director] Harry Hodge voted to put the company into administration when it was solvent. I abstained and wrote a two-page statement as to why,” Cheadle told Inside Retail.

Cheadle, who joined the board last March as part of a renewal process led by Weiss, said the company could have been restructured by selling assets and continuing on trade credit with suppliers. As a forensic accountant, Cheadle has a background in restructuring companies and countries such as Russia and Iraq.

She said she wasn’t concerned about the two shareholder class actions SurfStitch was facing – one of the main reasons the board gave for appointing administrators – since similar class actions in Australia had all been settled without ever going to court.

“Instead, [going into administration] has cost $7 million in administrative and legal fees and other costs,” she said.

She said she tried to minimise these costs by proposing a DOCA soon after administrators were appointed in order to return as much value as possible to shareholders.

“The motivation behind what I’m doing is very pure. I’m a non-executive director whose job it is to service the shareholders. I don’t take that job lightly. When the company was put into administration when it was solvent, I reacted in a way to return as much to shareholders as possible,” she said.

Last week, however, administrators recommended creditors approve a competing DOCA put forward by multi-channel retailer EziBuy, which they said offered a better return to all creditors, including shareholders involved in class actions against SurfStitch.

Cheadle on Tuesday sent a revised DOCA to shareholders, which gives class action creditors the same deal they would get under the EziBuy DOCA and uses different valuations to calculate the estimated return to creditors.

The administrators have not provided an updated recommendation to creditors, but a spokesperson from FTI Consulting said they are reviewing the letter closely.

“As with the previous communication issued by this party to shareholders in January 2018, the circular was issued without the administrators’ knowledge and was not authorised by the administrators or the companies,” the spokesperson said.

SurfStitch’s leadership are split over the two DOCA proposals. Pedersen and managing director Justin Hillberg have voiced their support for Cheadle’s proposal, while Sonand is backing the EziBuy proposal.

“I can see how the EziBuy deal is good for their group, but I don’t necessarily think it’s the best move for SurfStitch and its stakeholders,” said Pedersen, who left the business last year due to frustrations with the board’s cost-cutting approach.

“Abigail doesn’t want to run the business, she’s here to restructure it and set it free, that is her pedigree, as opposed to a fire sale. She’s got her heart in the right spot, there’s no greasing the wheels with her,” he said.

Whether creditors are willing to set SurfStitch “free” remains to be seen. Critics of the Cheadle DOCA have argued that SurfStitch has already proved it cannot be trusted to deliver a return to shareholders.

Cheadle said she the next iteration of SurfStitch would be different, since she would appoint a new board of directors, who are experts in running e-commerce companies, including Booktopia CEO Tony Nash.

Nash told Inside Retail he would bring his experience bootstrapping a $100 million business to act as a sounding board for the company.

“SurfStitch was a great business, it still is a great business and it will be a great business again,” he said.


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