Beauty (and companies) comes in all shapes and sizes!

Who knew it cost so much to go bankrupt? One of my favourite pastimes is to watch insolvent companies spend millions of dollars on administrators while creditors, employees and shareholders watch their cash switch corporate palms.

The airline Ansett, which once owned half the skies over Australia as part of a protected duopoly, was a great one – they pissed their employees’ entitlements against the wall as it wound up.

But SurfStitch, the company that famously spent eight million dollars for a website link on Coastalwatch, is a little closer to our surf shacks and they just shelled out over two million dollars to the administrator charged with sorting out its mess, FTI Consulting. That’s a hunk of change for a company that recently had to borrow four-mill to keep the lights on through Christmas.

Let me be clear. Administrators aren’t necessarily venal and wasteful. They’re thrown into some fucked-up situations and have to pull apart a web of complex biz dealings to work out what’s left over to share among the creditors. A necessary evil. But what did SurfStitch get for their two million?

The first thing to cover is that there are four groups holding pitchforks and torches. Employees are first. They want their entitlements. Creditors are second. They want their bills paid. Third in line are the shareholders. They want their shares to be worth something, anything, ideally better than the six-and-a-bit cents they were selling at when the company went into a trading halt. The final group is an angry mob of former shareholders who brought two class against against the company for misconduct (eloquently called Group Member Claimants).

The administrators job was to balance all the claims and come up with a relatively pleasing solution.

Four options were laid out.

Close the biz and pay out, close up biz and leave nothing behind, re-list on the stock market or get bought out, in this case, to accept an offer from plus-sized women’s label EziBuy (“Beauty comes in all shapes and sizes!”).

I’ll focus here on the two most likely options. Biz papers claimed that re-listing on the ASX was a real option, but seriously… the company is an absolute shit-show and, as the expression, goes: “The definition of insanity is trying the same thing over and expecting different results.”

Likely option #1: Close the biz
Employees’ entitlement’s are paid in full
Most creditors bills are paid in full
Group Members Claimants are allocated somewhere around $4.5-7.5m cash to split up
Shareholders lose everything

Sell to EziBuy
Employees paid out in full
Creditors paid out in full
Group claimants get around four million in cash to split up, plus they get a chest of shares in EziBuy
Current shareholders convert their SurfStitch shares to EziBuy shares

The catch with the EziBuy deal is that they aren’t listed on the ASX, so shareholders could be waiting up to three years before they can turn their convertible notes into anything tangible (shares and then cash). But better than ending up with nothing…. right?

But how did we end up here? How does a successful surf start-up end so badly?

Investors need growth. So the surf co turns its attention elsewhere, to the fabled masses in mid-west America and the mostly-landlocked European. And what position did this leave SurfStitch in? A negative cash flow position where they had to continually raise debt (borrow money) to buy stock, pay rent, employees and so on.

SurfStitch may have even got a little creative to make their balance sheet look more respectable to the market. Kim Sundell from TCI (Coastalwatch) launched his own battle against the company, alleging it falsified documents to inflate the share price.

Kim alleged that TCI Group Agreements were entered into for the purpose of inflating the revenue and profit of SGL (SurfStitch Group Limited) by approximately $18.3m in circumstances where the SGL Group would not receive the amount of $18.3m as a cash payment.

So now you’ve got former SurfStitch senior management under investigation by ASIC for the following breaches.

■ Sections 180, 181, 184: Civil and criminal breaches of directors duties;
■ Section 344(2): Financial reporting contravention by Director;
■ Section 674: Continuous disclosure contraventions;
■ Sections 1041E, 1041F, 1041H: Market misconduct;
■ Section 1043A: Insider trading; and
■ Section 1309: Provision of false or material information by an officer or employee.

And you remember the bullish buys of 2013-14, yes? What stock market investor doesn’t love a maverick snapping up businesses to try and create internal synergies and put the revenue on turbo through acquisitions? It don’t always work. In this case, SurfStitch lost exactly one hundred million dollars.

Surfdome bought for $45 million (from Quiksilver)/sold for $13 million
MSW & Stab bought for $14 million/sold for $2 million
Swell bought for $35 million (from Billabong)/No return
Garage bought for $15 million/Estimated sale under $1m
FCS bought for $23.7 million/ old for $17 million

$133 million outlaid/$33 million received back

Thems are numbers to put a shiver into any biz man’s spine.

The common line reported back by FTI Consulting on all these businesses was simple and consistent. “The transaction was completed on the basis that the business contributed no value to the SGL Group and would require ongoing financial support if it was not sold.”

In laymen’s terms, all those businesses were bleeding money and needed someone to plug the hole.

So what are we left with?

Former SurfStitch execs facing possible jail time. A bunch of shareholders receiving pennies on the dollar for their shares. And one of surf’s most promising start-ups of the digital age being bought by Alceon Group, a private-equity group who counts Noni B and Cheap as Chips as their star-studded retail jewels alongside the darling of middle-aged and plus-sized women, EziBuy.

And what are Alceon getting in return?

They’re paying around six million in cash plus issuing what they say is fifteen million dollars worth of shares.

Not that Alecon is going to extinguish SurfStitch’s…cool.

“Alceon Group says it has no intention of changing the culture of hip online surf and skate wear retailer SurfStitch​ if creditors approve a merger with EziBuy, which sells clothing and homewares to middle-aged women.” – Australian Financial Review