Dick Smith explores IPO: What its new owners got right that Woolworths never could

Only a year after private equity firm Anchorage Capital bought Dick Smith from Woolworths, the new owners have put out feelers for who might be keen to buy.

Anchorage has appointed Macquarie Bank and Goldman Sachs to explore a range of options for the company’s sale.

“Dick Smith’s turnaround strategy has been implemented very successfully and the business is now pursuing organic growth options such as the David Jones Retail Brand Agreement, the launch of post-paid mobile phone plans, its new store format, opening new stores and other initiatives,” the private equity firm said in a statement.

“Anchorage is a turnaround-focused investment firm, so given the business is now pursuing a growth agenda and following interest from the investment community, we have commenced working with advisors to evaluate potential options.”

The company has been valued at $550-$620 million, leaving the way open for a $600 million IPO.

In September last year, Woolworths was so keen to offload the business it had sunk millions trying to save that it sold it to Anchorage for just $20 million.

That agreement had a catch – Woolworths would collect a proportion of the sale price when Anchorage sold Dick Smith. Anchorage paid another $74 million to Woolworths earlier this year to get out of that agreement. Given today’s valuation of the business, it is unlikely Woolworths got the better end of that deal.

Retail marketing expert and SmartCompany blogger Kevin Moore, who’s just been appointed chairman of Crossmark Asia Pacific Holdings, says Anchorage has done a lot of things right in the past year.

They brought in Nick Abboud for one, a highly respected retail executive who was a contender to replace Myer chief Bernie Brookes when he retired.

And under Abboud, more often than not, they’ve been getting the basics of retailing right.

“There’s something called the retail trifecta,” Moore tells SmartCompany. “If you have all three of these things, you’ll make money.

“The first thing is a great store format. And Dick Smith has overhauled their stores. Number two is your point-of-sale and back-office systems, and they’ve put a lot of effort into that. The last thing is having well-trained and motivated sales associates on the floor.

“If you have those three things, people linger in your store, and they spend more.”

Regular SmartCompany readers will be familiar with the troubles Dick Smith has faced in recent years. When Woolworths sold the company, its profits were down to just $27 million. The company’s goods were neither cheap nor high quality. Its branding was a mess. And it was spread too thin – Woolworths shut down 70 stores in 2012.

Does this mean the Dick Smith brand is irrevocably damaged?

Moore doesn’t think so.

“Any retail brand that’s been around for 15 to 20 years has credibility. Sometimes, these brands just lose their way. But that credibility can be rekindled very quickly.

“And there isn’t really a negative feeling towards the brand.”

Australians are some of the most promiscuous shoppers in the world, Moore says. Brand loyalty doesn’t have much clout here. For a company like Dick Smith, that means shoppers are willing to pop into stores and give it a go.

Still, Anchorage’s success occurred faster than most observers would have predicted.

Market conditions might be prompting Anchorage to go to market sooner than otherwise intended, Moore says.

“They have turned it around so quickly, and the market’s good now. A large number of retail assets are coming back onto the blocks, because the United States is now significantly out of recession. People want to buy before the really good times, when they know there’s still growth to be had.”

This must be pretty galling for Woolworths, who owned Dick Smith for 30 years.

Last year, Anchorage Capital partner Michael Briggs told LeadingCompany Dick Smith was a “classic” investment for his firm.

“We look for orphans – businesses owned by larger organisations that don’t really fit. The Dick Smith business has never really fitted. It is a relatively small part of Woolworths. And specialty retail is quite different from the rest of the business.”

He said orphan businesses get bogged down in the policies and procedures of larger corporations, losing their agility in the process. “So they end up negotiating contracts slanted to what is required by a supermarket or by a Big W rather than Dick Smith. There are opportunities to move away from those and make it much faster, more innovative and nimble.”

The proof will come with the IPO. But early results suggest that the focused attention has paid off.


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