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Turn of the Tide for SurfStitch?

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By Published On: March 20, 20180 Comments

Administrators have recommended a vote for a proposal by EziBuy, with a positive result for creditors and a sliver of hope for the future of SurfStitch.

Collapsed online surfwear retailer SurfStitch may be thrown a lifeline by Alceon, the group previously involved in the turnarounds of Noni B and EziBuy. The Administrators, FTI consulting, are recommending that creditors vote in support of the Deed of Company Arrangement (DOCA) put forward by Alceon via its EziBuy Subsidiary. Non-executive director of SurfStitch Group, Abigail Cheadle, also put in a proposal late last year.

SurfStitch originally collapsed after a dud deal to buy assets from TCI Group caused profit downgrades, legal battles and class actions. The administrators found that  SurfStitch Group and SurfStitch Holdings (the Companies) were solvent at all times prior to their appointment in August 2017. They did however find that one or more former directors of SurfStitch Group may have contravened the Corporations Act at the time of entering into agreements with TCI Group. There are questions surrounding whether continuous disclosure rules have been breached as well as potential insider trading. The SurfStitch Group took legal action against co-founder and former Chief Executive Justin Cameron last year as part of its claim against TCI, alleging that he breached directors’ duties, did not act in good faith or in the best interests of the group and entered into the agreements with TCI for the purpose of inflating revenues and profits. The Australian Securities and Investments Commission (ASIC) has also commenced investigations into the TCI agreements with potential civil and criminal proceedings to follow.

The TCI legal action was settled last last year, but two class action claims are still before the courts. The EziBuy proposal takes this into account, with staff and ordinary creditors paid in full and shareholders and former shareholders signed up to the class action receiving 11.1 cents to 28.5 cents. This is far more attractive to administrators and shareholders than previous offers of 4.6 cents to 7.2 cents from Cheadle, as well as proposals from others including Booktopia Founder, Tony Nash. Existing shareholders would also benefit from the $15 million convertible note that would be turned into shares when it is triggered in three years (or when EziBuy is sold or floats).

A meeting of creditors will be held on Wednesday 4 April 2018 and creditors will be asked to decide whether the Companies should execute a DOCA, the Administrations of the Companies should end or the Companies be wound up. The Administrators consider that it would be in the creditors’ interests for a DOCA to be executed in accordance with the EziBuy proposal, delivering the best overall return to creditors and low execution risk.

EziBuy accounts provided in the SurfStitch creditors report showed the business had earnings before interest, tax, depreciation and amortisaion of $NZ2.1million in 2016-2017 (when it was owned by Woolworths) on sales of $NZ149.4 million. Alceon is forecasting earnings (EBITDA) of $NZ18.2 million at EziBuy this year on sales of $NZ167 million. Much of the success of the turnaround relates to aggressive discounting and clearance of aged stock. Given SurfStitch was profitable in 2016-2017 and the history of successful turnarounds by Alceon, there may be a change of fortune for the beleaguered company yet.

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