Anchorage hyped Dick Smith IPO with 'gold talk'

Anchorage Capital Partners, which more-than quadrupled its money buying retailer Dick Smith from Woolworths in 2012 and taking it public a year later, has reaped big profits from shaping industries in Australasia ranging from clothing and footwear, to burgers, tinned food and irrigation.

Anchorage paid as much as A$115 million for Dick Smith, although only about A$20 million was upfront. Woolworths, having struggled to find a fit for the electronics retailer acquired from its founder in the early 1980s, was keen to offload a non-core business that it took a A$420 million provision against in 2012. While criticised for selling the business too cheaply, it was small beer for a retail giant with 2013 sales of almost A$60 billion and profit exceeding A$2 billion.

For Sydney-based private equity firm Anchorage, founded by hands-on managing directors Phillip Cave and Daniel Wong, taking Dick Smith public was an unusual step. Four of the five exited portfolio case studies on its website involved trade sales. Dick Smith was put into receivership by its banks this week.

Private ownership means price details when assets are bought and sold aren't routinely made public and an Anchorage spokesperson said its executives wouldn't comment on the business.

Veteran fund manager Brian Gaynor was highly critical of Dick Smith's 2013 initial public offering, writing at the time that the sale was characterised by hype, or what is known in the industry as "gold talk". That's when unnamed investment bankers, PR flunkies or fund managers whisper in the ears of the media that a share sale is facing huge demand and interest to drum up the hoopla.

While private equity has brought some quality companies to the market, "people have got to realise when they are buying from private equity there's generally a high level of risk," Gaynor told BusinessDesk. "At the time, the IPO price (A$2.20 a share) seemed to be too high and there was a huge amount of hype or gold talk. The retailing industry is probably the most competitive and oversupplied in Australasia."

Anchorage has a fairly typical private equity strategy. Its targets include what it calls "fallen angels" - well-known companies no longer achieving their potential. It also looks for "orphans" such as Dick Smith - businesses unwanted or unloved by their larger corporate owners, and it seeks capital-constrained firms, or those transitioning out of family ownership. Its "sweet spot" deal has an enterprise value of A$30 million to A$100 million.

Its New Zealand interests have included Antares Restaurant Group, operator of the Burger King chain, which Anchorage paid $46.1 million cash in 2009 as part of a management buyout, before selling to US-based buyout firm Blackstone Group in 2011 for as much as $104 million.

Blackstone's Tango Holdings NZ unit has yet to post a profit from the Burger King chain, reporting a net loss of $7.5 million last year on sales of $178 million.

Another investment with New Zealand interests was Total Eden, a water services and management business Anchorage acquired for about A$20 million in February 2011 from what was then the ASX-listed Alesco Corp, which took an A$8.5 million impairment charge against the carrying value of that business as a result of the sale. Anchorage later sold Total Eden to ASX-listed Ruralco Holdings in 2014 for A$57.4 million. Anchorage said Total Eden had struggled with "exposure to unfavourable weather events, lack of acquisition integration and disengagement of owners and managers."

Golden Circle is a household brand in Australia and New Zealand, known for its tinned fruit and vegetables, juices, jams and baby foods. Anchorage and its equity partners acquired 35 percent of the company, then owned by pineapple growers, in October 2007 for A$35.5 million. At the time Golden Circle had a weak balance sheet and "unsustainable" capital structure, Anchorage said.

The turnaround took just over a year and involved "a 'back to basics' manufacturing programme" that was "focused on production efficiency and waste reduction", as well as improved relations with key customers, better product development, more scrutiny of cost of sales and pricing, and improved management processes. It was sold to HJ Heinz, the US food group now controlled by Warren Buffett's Berkshire Hathaway, in a deal finalised in late 2008, for A$288 million, suggesting Anchorage and its partners almost tripled their money.

Anchorage lists five businesses in its current portfolio, not counting the acquisition of Affinity Education Group, the Australian child care centre operator, completed last month. Of those, Kiwis would be most familiar with Brand Collective, the footwear and clothing business acquired from Pacific Brands in December 2014. Pacific Brands said gross proceeds of the sale were A$39 million, although a small set of brands was sold to two other buyers.

Brand Collective's brands include Superdry, Mossimo and Lee Cooper clothing, and shoe brands Clarks and Hush Puppies, which it distributes to retailers including Anchorage's own Shoes & Sox children's footwear chain in Australia, and sells through its own Shoe Warehouse outlets.

Anchorage said Brand Collective was "a classic orphan investment", being regarded as non-core by its owner and under-performing. The company is now in turnaround mode and there's no mention yet of a sale or whether it would be taken public. Another orphan in the portfolio is Acrow, the scaffolding and formwork business it acquired from Boral in 2010, and which may be getting closer to sale.

(BusinessDesk)