Shares in Dick Smith Holdings (ASX: DSH) got off to a mildly positive start on Wednesday when it debuted on the Australian Stock Exchange. It opened up 3.2% above the initial public offering (IPO) price of $2.20. However, by early afternoon, the stock was trading down 1% at $2.18.
Private equity firm Anchorage purchased Dick Smith in November 2012 from Woolworths (ASX: WOW) for $94 million. At today’s price, the 325-store network is valued at $540 million. Anchorage is retaining 20% of the shares, while management will hold 11.5%.
Recent reports have suggested this turnaround was possible due to Woolworths taking its eye off a relatively minor segment of its business and a great repair job attributable to Chief Executive Nick Abboud. This may be a warning sign for investors that the majority of upside is already reflected in the price. Additionally, investors may do well to remember prior floats such as Collins Foods (ASX: CKF) and Myer Holdings (ASX: MYR), where private equity backers sold out at the top of the market.
Recent IPOs have largely been a success, with the standout being outsourcing site Freelancer (ASX: FLN), which traded at more than five times its initial value on the first day. Others to open higher recently are law firm Shine Corporation (ASX: SHJ), insurance broker Steadfast Group (ASX: SDF) and IVF specialist Virtus Health (ASX: VRT). Given these exceptional performances, Anchorage was reportedly pushing hard to get the IPO away prior to Christmas.
Looking at the positives, last financial year Dick Smith reported a profit of $6.7 million but in the first quarter of this year had already achieved $6.1 million. Additionally, there are 46 new stores planned by next July and the company intends paying out approximately 60% to 70% of net profit for the 2014 financial year.
In my opinion, prospective buyers should be wary of purchasing shares in Dick Smith due to the turnaround prior to the float, Anchorage potentially looking to extract maximum float value whilst only retaining 20% and an uncertain retail environment.