Woolworths hardware businesses is set to be split in a three way deal with the Masters property assets going to a consortium of wealthy family offices, the hardware inventory going to Great American Group and the Home, Timber & Hardware (HTH) business going to Metcash.

The sale ends a drawn-out sale process for a difficult asset to sell over the past six months. Woolworths and its hardware joint venture partner Lowe's have been in negotiations since January, when Lowe's exercised an option to sell its 33 per cent stake in the joint venture to Woolworths and Lowes has since launched legal action which could potentially de-rail the deal.

Investment bank Citi have been advising Woolworths on the sale.

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What a ‘Super Tuesday’ it was. The budget was released, both ANZ and Woolworths announced their company results and the RBA dropped interest rates to a historic low. The RBA has now followed a raft of countries into a low interest rate environment, by lowering the cash rate from 2 per cent to 1.75 per cent. Does this mean the RBA thinks the Australian economy is in trouble? Why the rate cut?

Low Inflation Environment

The RBA appeared to be somewhat surprised with the 0.2 per cent fall in the consumer price index in the March quarter. A student in Perth might welcome a drop in the price of their cup of coffee, but falling prices are definitely not well received by the RBA. The crux of deflating prices is low wage growth, so although your cup of coffee may cost less, you are also being paid less. The RBA’s target for inflation is between 2 -3 per cent, so the RBA is clearly unhappy with an underlying inflation rate of 1.55 per cent, which is the lowest since 1983. Lowering the cash rate should put a stop to any further deflation, and stimulate price growth.

Strength of the Dollar

In theory exchange rate stability is not an objective of the RBA, but in practice the RBA does consider the impact of changes in the cash rate on the Australian Dollar. Exchange rates and interest rates have a direct relationship; this means that when the interest rate is cut, the exchange rate will also fall. The Australian Dollar has sharply rebounded since mid January and now sits at around 0.75 US cents. The Australian economy is in a state of continuous rebalance, following the end of the mining boom. Sectors such as tourism, education and services are of increasing importance, and a high Australian Dollar means these sectors become less competitive on the global stage. For example international students have to pay more for university degrees, and holidaying here becomes more expensive for foreigners. As a result the RBA seeks to limit the appreciation of the Australian Dollar in order to maintain growth in these non-mining sectors.

Housing Market

The so-called ‘housing bubbles’ in Sydney and parts of Melbourne are now less of a concern than they were in mid 2015. Sydney’s annual housing price growth has fallen to 8.9 per cent, as compared to a peak of 18.4 per cent last July. Further Glenn Stevens, the Governor of the RBA, outlined that the RBA was satisfied that regulatory actions to strengthen lending standards were working. In particular the Australian Prudential Regulation Authority (APRA) have put a 10 per cent growth cap on bank’s home lending to investors. This combination of abated housing price growth and increased regulation has provided the RBA with scope to cut interest rates, without worrying too much about re-inflating the housing market.

Global Outlook

There continues to be significant uncertainty surrounding the global economic outlook and policy settings around the world. Global growth forecasts have been continuously downgraded, and China’s growth slowed to a 25 year low last year. The RBA has not expressed any confidence in the future long-term growth in China, which further emphasises the need for the diversification of the Australian economy. Emerging markets, such as Russia and Brazil, are experiencing deep recessions.

Despite subdued global economic growth, low inflation, moderate housing price growth and a recent higher Australian Dollar the RBA does not necessarily think the Australian economy has slumped. The rate of unemployment has hit a six month low of 5.7 per cent in March, and GDP grew at a steady rate of 3 per cent last year. There is no doubt the economy is re-adjusting to the end of the mining boom, and this rate cut should provide a helping hand to the upcoming services sectors. Let’s hope that this rate cut also provides consumers and businesses with the extra confidence they need and that this voyage into unchartered territory pays off.

The tale of Dick Smith and Anchorage Capital:
Turning $10m into $500m in 2 years

You may recently have heard, Dick Smith has closed all it’s stores and fired close to 3000 staff. The backdrop to this involves Anchorage Capital and a $520m pay-day. The outcome has raised red-hot debate over the private equity industry, which may have important implications in the future.

So how did Anchorage Capital pull off such a remarkable feat, buying Dick Smith for $10m, and turning it into $520m, returning over 5200% in 2 years?

Part 1: Buying a $115m business for $10m

They set up a holding company called Dick Smith sub-holdings, which they used to acquire Dick Smith for $115m. Notes to the accounts show that only $20m was initially paid by the holding company, though Dick Smith already had $12.6m in cash. Digging further into the financial statements, Dick Smith sub-holdings was only created with $10m of capital. It seems likely that this was the initial contribution upfront.

So if Anchorage Capital only contributed $10m, where did the other $105m come from? This is where the magic happens. The answer is from Dick Smith’s balance sheet. First, they marked down the assets of the business as much as possible as part of the acquisition process. $58m was written off from inventory, $55m from PP&E and $8m in provisions were taken. This is an important short-term step because they want to sell off a large part of the inventory without racking up losses, as this would show up in financial statements and make the business hard to float. Now they can liquidate inventory quickly without racking up losses (i.e. have a big clearance sale). Inventory worth $371m, written down to $312m, within the space of 6 months, dropped to just $171m.

The reduction in inventory produced a gigantic operating cash flow, which essentially was from selling off all the inventory and then not buying any to restock. They used this cashflow from the Dick Smith business to fund the outstanding payments for the acquisition.

Voila, buy a business for $115m using only $10m of money from your own pocket.

Part 2: Selling a $115m business for $520m

Equity markets investors don’t care how much cash has been ripped out of the business, they care more about profit.

Now Anchorage Capital has to turn its focus to profit, hence the income statement, to make the business look as profitable as possible. The big clearance sale in the earlier year means there is essentially no old stock to start 2014, that’s extremely beneficial in consumer electronics where products have rapid obsolescence. The marked down inventory will still have some benefit flowing into the year. The PP&E write-downs means there is less depreciation flowing into into the income statement. These things combined can turn a profit of $7m in 2013, to $40m forecast profit in 2014. This allows Anchorage Capital to forecast huge profit numbers and on the back of this, float the business for $520m. Anchorage Capital quietly sold their shares later in 2014 and walked away with a cool half billion dollars.

Part 3: The aftermath

All the ‘financial engineering’ above has consequences. By the end of 2014, inventory increased back up to $254m and doing so meant payables to suppliers increased by $95m. However, end of FY2015 is when things went off the hook. Operating cash flows go into the negative and as suppliers demand payment, Dick Smith has to take out $71m in debt to maintain a more sustainable working capital. The positive effects of the inventory write-downs and other provisions have worn off by now and profit margins plummet.

Eventually the situation worsened and recently, Dick Smith made the decision to fire-sale all of it’s stock, close all it’s stores and make around 3000 employees redundant.

This buyout and float has raised many questions about the morality and legality of the private equity industry.

Last Thursday the Federal Reserve decided to keep its short-term interest rates unchanged, a decision that saw a steep decline in the U.S. stock market. Although the prolonged period of expansionary monetary policy has greatly contributed to the recovering U.S. economy, investors interpreted the decision as a sign that the U.S. is still weak and vulnerable to international economic influences such as the devaluation of the Chinese currency. The decision has greatly contributed to the overall market uncertainly and the sentiment is now strongly positioned towards the interest rates not being raised until 2016.

Read The Full Story Here.

Financial markets experienced an awful start to the week, with no asset classes spared. The S&P 500 plunged 5% at open, finishing 11% below the May high. European stocks fell by 5%, the most since 2008. Commodities sharply slid to a 16-year low with Brent crude trading below $45 USD.

Most selling has been attributed to the slowdown of growth in China which is seen in the devaluation of the Yuan and the continued decline of Chinese equities. It remains to be seen how poor upcoming Chinese economic data is and how far the market will fall.

Read the full article here