BBUS1DAS Business Finance - Assignment 1

Individual Assignment - Part 1

Question 3 (3 marks)

Extract from CRN “Total loss”: Dick Smith shareholder’s cautionary tale, by Rodney van Royden, March 28, 2017
“[Dick Smith Holdings] would need to see a substantial reduction in EBITDA from even our guidance before we even get close to our number with the banks. So no concern from my end.’ - Dick Smith leadership team - 28 October 2015 Conference Call Recording – Trading Update

Approximately two months later, Dick Smith Holdings was placed into voluntary administration and receivership having covertly well exceeded ‘their number with the banks’. The oldest and longest serving Australian electronics retailer – DSH – was in fear of being unable to repay their debt.

DSH appointed McGrath Nichol as administrators (to run the business whilst it was in the legal status of administration). The secured creditors (DSH lead bankers NAB and HSBC) also concurrently appointed Ferrier Hodgson as receivers. A basic difference between the two is that administrators primarily act for all creditors whilst receivers primarily act for the interests of the secured creditors.

McGrath Nicol later uncovered that Dick Smith Holdings had racked up a debt of nearly $400 million by the time of the demise.

After more than 45 offers were received to buy the business, none were deemed acceptable by Ferrier Hodgson, and the business was liquidated with hundreds of millions still owed to creditors.”

Required:
Using the Dick Smith Holdings (DSH) extract above review the 2015 DSH Annual report https://www.asx.com.au/asxpdf/20150818/pdf/430kvhrl8cpg0l.pdf and explain the key points that caused the business to collapse and where the senior management team should have identified there were serious problems with its operations. Hint: focus on inventory, supplies, borrowings and cash flows and use the Annual report figures to support your discussion (200 words). (3 marks)