It's only been 12 months since Woolworths (ASX: WOW) offloaded its underperforming Dick Smith retail stores to private equity firm Anchorage Capital for $94 million — including the recent $74 million follow-up payment to break the profit share agreement — however it appears Anchorage is already positioning itself to cash out at a healthy profit.
Reports that investment banks Macquarie Group (ASX: MQG) and Goldman Sachs are readying Dick Smith's for sale, possibly via a stock market float by the end of the year is certainly a fast turnaround for the private equity owners. Suggestions that an initial public offering (IPO) could see Dick Smith valued at between $550 million and $620 million will no doubt raise a few eyebrows amongst Woolworths' shareholder base.
It its last year under Woolworths' ownership (FY 2012), Dick Smith's earned just $24.6 million in earnings before interest and tax (EBIT). This compares with a report by the Australian Financial Review that analysts and fund managers are expecting the retailer to earn around $80 million in EBIT this year, which makes for a remarkable turnaround.
While some investors will no doubt shy away from any Dick Smith IPO considering the underperformance of department store Myer (ASX: MYR) since its sale out of private equity hands, with peers such as JB Hi-Fi (ASX: JBH) hitting a two-and-a-half-year high, the market environment obviously looks ripe for private equity to cash out.
Foolish takeaway
Just as Wesfarmers (ASX: WES) — now beginning to reap the profits following the purchase of the Coles Group — will have Coles shareholders questioning whether their company was given away too cheaply, the returns now being generated by Dick Smith under Anchorage's ownership suggest Woolworths may have given the electronics retailer away far too cheaply as well.
If Dick Smith is ultimately sold for a large profit, it will no doubt lead investors to ponder if Woolworths' management with their vast retailing experience couldn't extract the same levels of profitability from the Dick Smith assets as Anchorage has, should they be trusted to head into the completely uncharted waters of home improvement?
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Motley Fool contributor Tim McArthur owns shares in Macquarie Group.
