Will anyone buy Dick Smith? Here are the five most likely candidates

Woolworths confirmed yesterday what every industry analyst predicted – it would sell off the Dick Smith chain as part of a strategic review.

The company says the chain is just too far out of its core business to make an impact. Chief executive Grant O’Brien explained yesterday that a sale process will begin, while 100 stores will be closed over the next two years.

The only question remains – who’s going to buy Dick Smith?

It’s not going to be easy to sell. While the company is still profitable, it is fighting a losing battle competing with price-driven giants such as JB Hi-Fi and Harvey Norman and an army of online competitors.

There have been plenty of names thrown around, but who exactly is in the best place to pick up Dick Smith? We look at five candidates…

Solomon Lew

As one of the biggest retail personalities in Australia, any time an asset comes up for sale his name gets a mention. But does he want it? Probably not.

Although Lew has enough experience to take on this chain, it’s probably not a worthwhile investment for a company focused on fashion. All in all, it’s pretty unlikely he’ll make a move here.

JB Hi-Fi

Competition from JB Hi-Fi is probably one of the main reasons Dick Smith is being sold and the rival is in a reasonable position to take over the chain. It’s in the same industry, the two companies could combine much of their inventory and it would expand the company’s footprint.

But it’s unlikely to ever happen. For one thing, the companies aren’t that alike. Dick Smith operates smaller stores whereas JB Hi-Fi requires large, warehouse-style layouts. Preparing all those stores for a refit would take too much time and money, especially considering they’d be too small.

Then there are the finances. Last year JB Hi-Fi warned its first-half finances were likely to be down 5% – a shock announcement for the retailer once held up as an example of industry resilience.

JB Hi-Fi has over 140 stores with $196 million in EBIT – why would it add hundreds more for just $20 million in EBIT? There’s too much work for too little gain. JB is focusing on profit right now, and buying Dick Smith is sure to ruin that strategy.

Best Buy

This American chain is another likely contender. Buying Dick Smith would be a good way to enter the Australian market and compete with JB Hi-Fi. And although it requires larger stores, opening Dick Smith properties could be a great way to start.

The only problem? Best Buy is having problems of its own. As Forbes pointed out earlier last month, it’s facing a smorgasbord of financial troubles.

For one thing, investors didn’t have their confidence bolstered by the latest earnings announcement, and over the past 12 months its shares have fallen by about 40%. Analysts are now downgrading the company and it only has a market cap of around $US9 billion.

None of these things prevent an overseas expansion but they certainly make it less likely. With so many more products available online cheaply through Amazon and other retailers, Best Buy is struggling to compete.

Harvey Norman

It’s not out of the question for Harvey Norman to buy Dick Smith. In fact it’s probably one of the more likely options, with the company having shown a tendency to pick up failed chains in the past.

But that’s exactly where they’ve gone wrong before. The Clive Peeters acquisition was a costly mistake, with the company having shut most of those stores, and it’s unlikely the company will want to take on a further 300 stores for a measly $20 million in profit. It’s too much work for the company already suffering under falling sales

Private Equity

This seems the most likely outcome. Private equity has been waking up lately, with investors and other firms picking up deals quite cheaply. A number of high profile deals are also ongoing, including the current negotiations for Spotless Group. The only question is whether a company will want to take on a chain with hundreds of stores, and which company?

Moreover, what would private equity see in such a venture? The stores are certainly profitable, but a private equity firm may want to cull down the number of stores being sold in order to create a base from which to work.

A private equity deal will certainly be on the cards as the most likely option, and it can be almost guaranteed whichever company bites will get a discounted price.