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Are Woolworths’ shareholders $400 million poorer?

With the headline “Woolies to face grilling over Dick Smith” leading a Fairfax media report last week, the stage has certainly been set for management at Woolworths (ASX: WOW) to come under some pretty serious questioning from shareholders and analysts over the next few weeks and months.

The catalyst for this headline was details surrounding the approaching initial public offering (IPO) of Dick Smith by private equity owner Anchorage Capital Partners. Woolworths in total has received $94 million in proceeds from the sale of Dick Smith — not $20 million as some reports have suggested. However news that in just over 12 months since taking control, Anchorage is looking to ‘flip’ the electronics retailer for $520 million suggests shareholders have missed out on potentially around $400 million in foregone profits.

While it is understandable that Woolworths decided to ultimately not retain Dick Smith given its deep retailing experience, shareholders are surely left wondering how Anchorage has produced such a turnaround in the fortunes of Dick Smith, from which it is set to profit handsomely.

Amongst changes instigated by Anchorage have been an agreement reached with department store Myer (ASX: MYR) to operate a store-within-a-store concept and an expansion plan that is seeing the business open a store a week. With the CEO of Dick Smith believing the firm is a ‘growth stock’ it wouldn’t be surprising to see the market value the business on a similar multiple to fellow electronics retailer JB Hi-Fi (ASX: JBH).

Foolish takeaway

With the retail offer on the IPO expected to open tomorrow (Friday, 22 November), some investors will of course be tempted to invest. While investors will make up their own minds, one thing worth remembering is that Anchorage’s duty is to get the best price for Anchorage not for the IPO buyers of the stock.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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