Woolworths sells Dick Smith for a bargain basement price

Woolworths today revealed it is selling Dick Smith Electronics to an Australian private equity firm for $20 million.

The sale of Dick Smith to Anchorage Capital Partners ends an eight month search for a buyer for the beleaguered electronics chain which recorded a pre-tax profit of $26.8 million in 2011, down 14.9% over the past year.

Analysts had speculated Dick Smith could fetch anywhere between $10 million and $50 million.

The transaction is expected to be completed in late 2012 and follows Woolworths chief executive Grant O’Brien’s announcement in January this year that the retail giant intended to exit the Dick Smith business through a restructure and divestment process.

Under the sale agreement, Anchorage will purchase 100% of the business including 325 stores employing more than 4,500 people and Dick Smith will continue to trade.

Initial cash proceeds will be $20 million to be received in the next financial year, with Woolworths potentially benefiting from any upside resulting from a future sale of Dick Smith by Anchorage.

The sale follows a $420 million restructuring provision that Woolworths took in this financial year pending the divestment of Dick Smith and, following the completion of the sale, Woolworths says it will have no future downside exposure to the ongoing business.

Woolworths also announced it is selling Woolworths Wholesale for $35 million to Infiniti Retail, which is owned by Indian conglomerate Tata Sons.

Woolworths has partnered with the Tata Group since 2005, with the original aim of merging the wholesale and retail consumer electronic businesses. However, with the sale of Dick Smith, this was no longer possible.

O’Brien said the sale of Dick Smith followed a review and restructure which determined that the business was non‐core in the size and context of the broader Woolworths retail platform and focus on maximising shareholder value.

“We announced the company’s strategic priorities in November 2011, which included a review of our portfolio of assets, particularly our participation in the consumer electronics category, with a view to maximising shareholder value.

“These businesses were a small part of Woolworths and this divestment will allow us to be fully focused on the core parts of our business.”

O’Brien said Woolworths will now work closely with Anchorage and the Dick Smith team to commence a smooth transition to new ownership and separation from Woolworths.

Brian Walker, chief executive of the Retail Doctor Group, told SmartCompany that Dick Smith was “non-core” for Woolworths and had suffered from increased competition.

“A recent Citigroup report said Apple do $4.8 billion, and in Australia and New Zealand the average Apple store does $35 million to $50 million, while the average Dick Smith store does $3.5 million to $5 million and therein lies the story,” says Walker.

Walker says when Dick Smith was at its zenith it really owned the consumer electronics space until Apple and other big category killers came along.

“The Dick Smith business is really in the perfect storm as it has increased commoditisation of products; people can go online, it has deflation of some of its key categories like televisions and it is just struggling to be really relevant in this new technology way,” says Walker.

He says Anchorage is likely to have been attracted by the “red hot price” from Woolworths.

“It’s an extremely well-known brand in this country and it has a big footprint.”

Anchorage needs to try to work out what Dick Smith’s core offering is, according to Walker, and cut non-performing areas.

“They are a little bit of all things, Dick Smith, and I’m not sure I even know what their core offer is,” he says.

“They need to really reaffirm its direction and look at where it is making its money; what the consumer trends of the future are and what categories it doesn’t make great sense to play in.”

This story first appeared on SmartCompany.