Activist investor turns its attention to Specialty Fashion Group

Activist investor turns its attention to Specialty Fashion Group

Source: The Australian Financial Review
By: Sarah Thompson, Anthony Macdonald & Joyce Moullakis.

Activist investor Sandon Capital is calling on the directors of embattled retailer Specialty Fashion to rethink their strategy and consider an equity raising to salvage the company’s balance sheet.

Street Talk can reveal Sandon managing director Gabriel Radzyminski has written to Specialty Fashion’s chair Anne McDonald, suggesting that an equity raising would be preferable to an asset sale “at a suboptimal price”.

According to the letter which was sent this week, Radzyminski said stockbroker Taylor Collison had indicated a “keen interest in underwriting any entitlement offer,” and put forward a scenario of a 1 for 2 rights issue at a price of 20¢ per share.

“A rights issue on these (or similar terms) would raise approximately $19.2 million prior to offer costs.”

It comes as Speciality Fashion considers selling all or part of its business, in a process handled by Luminis Partners.

Specialty Fashion’s precarious financial position was disclosed in audited accounts for the six months ending December, as reported by The Australian Financial Review last week.

The company said that net profit plunged 74 per cent to $3.1 million and underlying earnings before interest, tax depreciation and amortisation – before about $3 million in restructuring costs and store closure provisions – dropped 40 per cent to $18.4 million.

The accounts underscored the challenge ahead for new chief executive Daniel Bracken and the Specialty Fashion board, which has received approaches from potential bidders and offers for individual brands such as City Chic.

Sandon Capital has about a 3 per cent stake in Specialty Fashion.

Radzyminski thinks the board and shareholders must remain “clearly focused” on the long-term value that exists in Specialty Fashion “and resist the temptation to take the money and run”

He calculates Specialty Fashion to be worth at least $90 million (47¢ a share) prior to any potential capital raising.

“If we are to further assume that Specialty Fashion is successful with its store optimisation and transformation program, we believe the business has the capability to generate at least $25 million to $30 million of earnings before interest, tax, depreciation and amortisation.

“Using the same conservative assumptions of net cash of zero at June 30 2018 and an EBITDA multiple of 5 times, we calculate Specialty Fashion to be worth $125 million to $150 million, or 65¢ to 78¢ a share.”

Radzyminski notes his analysis does not take into account the large balance of franking credits. He plans to discuss the possibility of an entitlement offer with other stakeholders, with a view to garnering support for a recapitalisation

“A rights issue of the type we are proposing should be well received by most shareholders, especially if it removes any pressure that exists to sell assets in the short term.”

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