SurfStitch administrators back merger with EziBuy, confirm...

SurfStitch administrators back merger with EziBuy, confirm misconduct concerns
By Sue Mitchell
March 19 (Financial Review) -- SurfStitch creditors will meet on April 4 to consider a proposal that could see the youth-oriented online surf and skate wear retailer merge with New-Zealand based etailer EziBUy, which sells clothing and homewares to middle-aged women.
In their long awaited report to creditors, SurfStitch's administrators have recommended creditors approve a deed of company arrangement proposed by EziBuy in preference to a DOCA proposed by SurfStitch non-executive director Abigail Cheadie and backed by general manager Justin Hillberg and one of the company's founders, Lex Pedersen.
The administrators also found that SurfStitch Group and SurfStitch Holdings were solvent at the time of their appointment, but one or more directors may have broken the law and engaged in market misconduct and potentially insider trading.
The administrators - John Park, Quentin Olde and Joseph Hansell of FTI Consulting - said the EziBuy proposal would deliver the best overall return to creditors and held low execution risk.
Under the proposal backed by Ezibuy's parent, private equity company Alceon Group, which owns womens wear retailer Noni B, ordinary Surfstitch Group and SurfStitch Holdings shareholders and employees would be paid in full in six to eight weeks.
Class action creditors would receive a cash dividend between $3.4 million and $4.3 million and convertible notes which would convert to shares in EziBuy valued at between $6 ???million and $20 million, while current SurfStitch shareholders would receive a convertible note which would convert to shares in EziBuy worth between $1.5 million and $5.0 million.
These shares would be issued at the time of a "liquidity event" such as an IPO or trade sale of EziBuy, whichs sells mainly clothing, sleepwear and lingerie for mature-aged women through catalogues and online.
Alceon acquired the loss-making EziBuy from Woolworths last year and appears to have achieved a turnaround as stunning as that at Noni B by clearing aged stock and improving its catalogues.
Alceon is forecasting earnings (EBITDA) of $NZ18.2 million at EziBuy this year on sales of $NZ167 million compared with losses (before interest and tax) of $A2.5 million in 2017 and $A15.2 million in 2016 when EziBuy was owned by Woolworths.
Under the Cheadle proposal, SurfStitch Group shares would relist on the Australian stock exchange, employees and ordinary creditors would be paid in full in six to eight weeks and class action creditors would receive shares in Surfstitch worth between $3.8 million and $6.1 million. Current SurfStich shareholders would emerge with 47.85 per cent of the relisted group worth between $6.2 million and $9.7 million.
However, the adminstrators said the overall return under the Cheadle proposal was not as high as under the EziBuy proposal and the execution risk was low to medium. SurfStitch would need a waiver from the ASX to conduct a share issue without shareholder approval and the DOCA proosoal had no remedy for class action creditors if the shares were not issued.
Both the EziBuy and Cheadle proposals would deliver better returns to creditors than winding the companies up.
The administrators found that both SurfStitch Group and SurfStitch Holdings were solvent at all times prior to their appointment on August 24 last year.
However, they found that one or more former directors of SurfStitch Group - including co-founder and former chief executive Justin Cameron - may have contravened the Corporations Act and breached his statutory duties at the time of entering into agreements with Kim Sundell's Three Crowns Investments (TCI) Group.
The administrators said the director/s may have failed to take reasonable steps to cause the company to keep adequate written financial records, breached continuous disclosure rules and potentially engaged in insider trading.
SurfStitch Group took legal action against Mr Cameron last year as part of a claim against TCI.
SurfStitch alleged Mr Cameron 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 by approximately $18.3 million.
The Australian Securities and Investments Commission has also commenced investigations into the TCI agreements and is looking into potential civil and criminal breaches of directors duties, continuous disclosure contraventions, market misconduct, insider trading and provision of false information.
ASIC has issued notices under Section 19 of the Act to certain senior executives of SurfStitch Group requiring them to appear before ASIC for examination under oath.
The TCI legal action was settled last last year, but two class action claims alleging SurfStitch Group breached continuous disclosure obligations and engaged in misleading and deceptive conduct are still before the courts.
The administrators said they had not yet formed a view on liability but if some or all of claims made in the class actions were admitted the claims could potentially be worth more than $85 million and exceed the available assets of the group.
The administrators have not spoken with Mr Cameron about the allegations made against him and no concluded view has been reached on whether Mr Cameron breached any director duties.
more to come ...