The saga that enveloped the Direct Factory Outlets chain and its wealthy owners David Goldberger, David Wieland and Graeme Samuels, has once again underlined the warning that should be used for an Australia-wide business safety campaign: debt kills.
And while the owners of DFO’s parent company Austexx have avoided collapse, the DFO story should join a long list of disasters involving wealth business people that entrepreneurs should study carefully for some valuable lessons.
The common thread in the collapse of the empires of Eddy Groves, Phil Green, Ric Stowe and Tom Hedley was excessive debt, although each rich disaster had its own unique causes.
Let’s take a look at 10 of the big rich debacles of the last few years and extract the lessons.
There are a number of key lessons from the Austexx near-collapse. No doubt Graeme Samuel will be reviewing how a blind trust should best function and David Goldberger and David Wieland may be questioning how intense competition has become at the discount end of the retail market.
But the standout lesson involves what can go wrong when a company changes its successful formula. The original idea behind the DFO chain – stick up a relatively cheap building in a relatively cheap outer suburb and sell relatively cheap brands – was brilliant, but with the troubled South Wharf development in Melbourne things changed.
As well as the standard DFO, there was an office building, a food court, cinemas and restaurant area (not all of these are actually finished). The building costs went up, the debt required went up, the risk went up and the problems started.
The collapse of Perth entrepreneur Ric Stowe earlier this year came as something of a shock. The reclusive rich list member never did things in public view, but there wasn’t much to suggest things were going badly either.
However, as the story behind Stowe’s $1 billion collapse emerged, it became clear that he has used a reasonably straightforward, valuable business – a coalmine – to underwrite the construction of a risky and expensive one – a coal-fired power plant. A bold plan, but ultimately one that Stowe couldn’t pull off before his lenders pulled out.
Pubs always look like such an attractive business – relatively stable, strong cashflow and – let’s be honest – good fun. Yet as Cairns-based entrepreneur Tom Hedley found out, it’s not all as simple as it looks.
Hedley went on a pub-buying rampage in 2006 and 2007, amassing a substantial portfolio by using debt to pay high prices. But owning a few pubs in Cairns is very different to running a portfolio of hotels across the country, particularly when an economic downturn hits your construction business and commercial property portfolio. For Hedley it was a case of too much, too fast.
One year, Tony D’Antonio and Peter Hosking were running the highly successful tool company GMC, and riding high with a fortune of $300 million. The next year, after Bunnings dropped their products, GMC was gone.
D’Antonio and Hosking had used a brilliant strategy of targeting the DIY market with cheap but reliable tools imported at low cost from China. But the big retailers soon realised they could replicate the model, and start importing tools directly under their own brands. Once Bunnings dropped GMC, the business was all but finished.
Eddy Groves was one of the first wealthy entrepreneurs to collapse during the GFC, due to a heady mixture of debt and aggressive growth. Part of the problem was Groves decision to push ABC into the US and Britain, to keep producing the sort of top-line growth he believed his shareholders wanted to see. But with Groves focussing overseas, the performance of the Australian business started to fall away. Groves tried to sell ABC’s offshore operations, but in the end it was too late.
The collapse of Gold Coast financial services/property/tourism business MFS, which was founded by former rich listers Phil Adams and Michael King, has been examined in court in recent months as liquidators try to get to the bottom of the disaster. What is clear from the hearings is how complex the company’s structure was.
As well as having interests in everything from residential property to funds management and aquariums, there was a huge web of companies and an estimated $1 billion of inter-company loans – one former chief operating officer said he was a director of 26 separate companies. That sort of structure is simply impossible to control and monitor.
As MFS entered its death throes in early 2008, fellow Gold Coast property and financial services company City Pacific tentatively proposed a merger between the two companies. It wasn’t a good sign for City Pacific’s future; by August 2009, it was also in receivership.
City Pacific had many problems (mainly high debt levels and a complex structure) but one crucial issue was the high number of dud loans it made to property developers in the Gold Coast region. When the GFC hit the Coast, City Pacific was left with nowhere to go.
City Pacific did not go down without a fight. In February 2009, it put three companies belonging to Gold Coast developer Craig Gore into receivership, claiming that Gore’s companies owed $145 million.
The receivership was quickly followed by an ugly legal battle between Gore and City Pacific and over the last 12 months Gore has faced off with a range of creditors in the courtroom, including the Australian Taxation Office and Permanent Custodians. As Gore himself said early last year: “Nobody likes to go to court”.
Former Babcock & Brown chief Phil Green made just one appearance on the BRW Rich 200 in 2008 – in the year that followed his fortune and the company he built into a $10 billion giant was all but wiped out.
Babcock & Brown was set up as a mini Macquarie and its model was relatively simple: buy big expensive assets (property, energy assets, infrastructure), sell them to satellite vehicles and take fees all the way through for arranging and managing these transactions. The problem is that model relies heavily on debt to keep buying assets and keep the fees rolling in; when the credit squeeze hit, Babcock’s high debt and low cashflow meant it couldn’t keep paying its interest bills. In the end, those billions of dollars in assets couldn’t help it avoid collapse.
While corporate debt caused most of the problems above, personal debt has been another feature of recent collapses involving wealthy entrepreneurs. Former rich list member and Allco chief David Coe was one of those who used margin loans to build impressive stakes in their companies. When debt was cheap and the shares were rising, the idea worked brilliantly. But as the share price fell and Coe was forced to sell shares to meet margin calls, his personal borrowings helped speed Allco’s demise.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
