Thanks for the references. I had forgotten the sale from Woolworths to a Private Equity group.
I'm sorry this is bit off topic but I do think the description, within https://www.abc.net.au/news/2016-01-05/dick-smith-enters-vol... , of what took place in the brief period between when the Private Equity group bought Dick Smith and when they floated it is well worth reading.
FWIW my experience of seeing this stuff happens is it only works where you have a company that non-institutional investors think they know and understand. In the case of Dick Smith it was a well liked and very visible brand within Australia. If the same financial engineering had been done to some obscure industrial group the Private Equity group would have had to rely on selling the shares to institutions and they would have been much more aware of what they were buying.
Here's the segment from the ABC piece ...
Private equity group Anchorage Capital bought Dick Smith from Woolworths in 2012 for an initial payment of just $20m.
Anchorage then "dressed the company up to look good for just one thing - to persuade people to buy shares," according to analysts from Forager Funds Management.
Anchorage "wrote down the value of the inventory, took provisions for future onerous lease payments, wrote down the value of the plant and equipment and liquidated a lot of the inventory as quickly as they possibly could to throw off cash," according to Forager's Steve Johnson.
The cash was then used by Anchorage to effectively make Dick Smith 'buy itself'.
The writedowns inflated profits, a key factor in enticing investors into the company.
For example: a stock item that may have been bought for $100 may have been in the books at $60 after the writedowns, which meant an extra $40 profit on every sale.
The writedown of plant and equipment lowered depreciation charges, also boosting the bottom line.
"But when they liquidated all that inventory to pay for the purchase price, they didn't replace it," according to Forager's Steve Johnson.
"And the new owners of the business, since it's been listed on the stock market, have had to put in a lot more money to fund the increase in inventory."
