Dick Smith, Burger King, David Jones: Is it third time lucky for Anchorage?
Anchorage Capital Partners has seemingly disproved the proverb that opportunity seldom knocks twice. In fact, for the private equity firm, chances have been plentiful. Anchorage struck gold with the $20 million acquisition of the Dick Smith consumer electronics chain from Woolworths Group in November 2012. Anchorage Capital floated Dick Smith on the Australian Securities Exchange with an enterprise value of $520 million less than two years later, reportedly giving Woolworths a modest slice
slice of the realised profit.
Woolworths had written off more than $420 million restructuring the business, which was Australia’s largest consumer electronics chain by store count. It had done all the heavy lifting to improve the performance of the chain. Anchorage Capital, at best, added some finishing touches to Woolworths’ turnaround strategy and reworked the balance sheet for the sharemarket float.
Dick Smith collapsed in January 2016 with debts of more than $390 million; Kogan acquired it from administrators for an undisclosed sum.
Earlier, in 2011, Anchorage didn’t exactly give The Blackstone Group a robust business when it sold the Burger King fast food chain either, after spending two years implementing a turnaround plan.
After the ownership change, Burger King made a $2 million loss in 2012, a $4 million loss in 2013, and a $7.5 million loss in 2014, New Zealand financial press reports stated.
Then, last year, Anchorage Capital acquired David Jones. Is it third time lucky for Anchorage – or rather, the businesses it acquires?
No more balance sheet shuffle
In a remarkable deal, Anchorage acquired the upmarket David Jones department store chain for what is understood to be $120 million from the South African Woolworths Holdings. (By the way, Dick Smith ran concession outlets, but not successfully, in David Jones stores between 2013 and 2016.)
Woolworths Holdings has invested heavily in turnaround initiatives at David Jones, in a bid to recoup some of the $2.1 billion it outlaid for the chain in 2014 and its subsequent losses and restructuring costs.
The restructuring has included store closures, floorspace reductions in some retained stores, supply-chain changes, investment in online retail platforms and the abandonment of a retail food strategy. Like Woolworths Group with Dick Smith, Woolworths Holdings has done much of the heavy lifting in rejuvenating the David Jones business.
It has recovered some of its losses through property sales, and it will retain the Melbourne flagship store and potentially net some return on Christmas and new year trading, with Anchorage Capital scheduled to take ownership in March.
Typical private equity investments are for around five years, but Anchorage exited Burger King NZ and Dick Smith after just two years – raising questions about its plans for David Jones.
Stakeholders hope it’s not another quick exit after a balance sheet shuffle that encumbers the department store chain with debt, especially as interest rates and operating costs bite.
The higher costs of doing business, along with the impact on consumers of inflation, higher interest rates and cost-of-living increases no doubt hastened the decision to sell to Anchorage Capital at what appears to be a bargain price.
As Inside Retail has reported, Woolworths Holdings had been looking for a buyer for the David Jones business for more than two years and canvassed various options that might have helped salvage some of its original investment without further risk.
A merger with Myer was considered but discounted due to the risk factor and anger of South African investors over the losses incurred on the David Jones business.
Even before Woolworths Holdings confirmed last year it was looking to divest in David Jones, it had attracted a number of potential buyers, including other private equity firms and reportedly both rival Myer’s largest shareholder, Solomon Lew, and mining magnate Andrew Forrest. But it seems only Anchorage Capital was willing to strike a deal for the 43-store chain.
Myer merger in the offing?
The sale of David Jones clearly raises the prospect of a merger with the 58-store Myer business, which is listed on the Australian Securities Exchange with a current market capitalisation of around $558 million.
Anchorage Capital’s previous two retail investments involved a quick spit and polish, cutting costs, pumping up short-term profit numbers and making a quick and lucrative exit.
This time, however, most, if not all, retail analysts would agree that the real opportunity for Anchorage Capital is to pursue a merger with Myer, extract substantial synergy benefits and form a stronger company to navigate challenging and changing retail conditions.
But the objectives of three key players are central to any potential merger: Anchorage Capital, Myer CEO John King, and Myer’s largest shareholder, Lew.
The private equity firm may well see its opportunity as selling David Jones at a healthy profit on its outlay to Woolworths Holdings, rather than building a stronger department store company.
As for Myer, it is not clear whether it was one of the tyre kickers considering the acquisition of David Jones, but it previously believed there was merit in a merger. In fact, this triggered the Woolworths Holdings takeover offer in 2014.
The price of a Myer-initiated merger offer would be higher in any deal with Anchorage Capital than it would have been with Woolworths Holdings.
Meanwhile, Myer stakeholder Lew’s FY22 results for Premier Investments included commentary about the company being on the lookout for acquisitions. Yet it seems Lew passed on David Jones or, alternatively, Woolworths Holdings was reluctant to deal with him after years of aggravation involving Lew’s minority holding in Country Road, and the role he played in forcing up the cost of its acquisition of both David Jones and Country Road in 2014.
Lew now haunts Myer directors and management and is positioned as a crucial player in any move for a merger of the two department store chains.
Following the finalisation of the sale of David Jones to Anchorage Capital in March, Woolworths Holdings will retain its ownership of the Country Road Group.
David Jones stores are expected to continue to stock Country Road brands, although a formal supply contract has not been signed.
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