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
