Vulture funds – Will Dick Smith meltdown be replicated at MediaWorks?

To date most of the mainstream media focus on the collapse of Dick Smith has been the impact on customers not being able to cash in their vouchers. This small minded approach manages to miss most of the real issues going on.

One of the fascinating insights into the meltdown at Dick Smiths is the venal manner in which vulture funds swoop in and gut and asset and flog it off…

Private equity firms typically represent informed investors such as high net worth individuals, or fund managers looking for higher returns through leveraged investments.

Typically a private equity firm will undertake a portfolio of highly leveraged investments in different sectors achieving a level of diversity but at a high risk the longer they stay in.

The firms have a very clear objective: identify businesses with potential for high returns based on their balance sheet, operating potential or capacity for leverage and for tax benefits but to exit as soon as objectives are achieved.

The objective is not to acquire a business with the objective of investing for the longer term, but purely with a view to exiting at a point where the return for risk relation is maximised.

This means that an exit is planned from day one to the extent return is not compromised. The long term prospects for the business are only of interest to the private equity firm to the extent that it helps dress the business for the market to help with the private equity firm’s exit. In the case of exit by listing this will typically involve changing and packaging the business so it is perceived as a more valuable investment by future investors. The packaging will typically involve all essential market positive aspects of the business, the balance sheet, capital structure and management.

If an acquired business is already listed, often they will de-list the firm, restructure and repackage it and then place in on the market through a stock exchange or sell it as going concern in part or whole in a sale. Often they will acquire divisions or segments of businesses within larger enterprises as was the case for Dick Smith.

…this type of vulture economics is the very kind Jane Kelsey warned of in her book last year.

What’s concerning is the same type of vulture fund currently owns MediaWorks. Oaktree is trying to play the same game by gutting MediaWorks of any costs, hollowing out so that they can chop it up and sell it. The problem has been however that Mark Weldon’s cuts have damaged the brand so badly that Oaktree can’t sell. It may be that Oaktree accept their losses and just dumps the business, either way, MediaWorks is close to being as self mutilated as Dick Smith.