The long tale behind Allphones’ descent into administration
- 31 March, 2017 10:56
The companies comprising the Allphones Group were hit hard by the Samsung Galaxy Note 7 debacle, iPhone 7 delays, and multiple contract terminations in the lead up to the withdrawal of funding that saw the businesses enter administration in February.
Mobile phone retailer, Allphones, went into voluntary administration in February, with at least 18 of its stores around the country closing up shop due to “insufficient funding”, resulting in more than 60 redundancies.
A new report by the companies’ administrators, Philip Carter, Daniel Walley and Mark Robinson of PPB Advisory, reveals the major contributing factors behind the group’s demise, and a fresh glimmer of hope for some creditors, in the form of a multimillion-dollar cash injection by owner, Skidmore Retail Group.
Following initial investigations, the administrators said they concur with the companies’ directors’ stated reasons for the collapse, which was blamed on the loss of customers and key contracts, excessive cost structure, poor economic conditions and the withdrawal of shareholder support – the latter of which proved to the be the final nail in the coffin, according to the report, which is dated 27 March.
“The companies were operating in difficult commercial circumstances from 2014 due to the loss of major customers and they were unable to trade out of their poor financial position despite attempts to alter their business model,” the report, which runs to more than 200 pages, stated.
“If it were not for the cash injections from [former owner] Glentel and Skidmore, the companies would have been considered insolvent from 2014.
“Traditional balance sheet tests…suggest that the companies were insolvent from 2014. However, from a cash flow perspective, the companies’ solvency was maintained by virtue of the funding they were receiving from the shareholders (Glentel and then Skidmore),” it said.
As such, it is the administrators’ opinion, on the basis of the support provided by the shareholders and the regular receipt of funding, that the companies were solvent until Skidmore withdrew its financial support on the (Canadian) weekend of 4 -5 February 2017.
The administrators’ investigations indicate that from financial year 2014 onwards, the companies were reliant on their shareholders for funding and, during this period, a total of $38.9 million was provided by their shareholders to support significant losses.
At the beginning of the 2014 financial year, the Allphones Group operated 134 Allphones stores across Australia and the Philippines, and managed 45 Virgin Mobile branded stores, as well as two Samsung Experience Stores. Throughout that year, sales revenue averaged over $9 million per month and pre-tax earnings (EBITDA) losses averaged $500,000.
According to the administrators, in April 2014, Optus, as the owner of Virgin Mobile in Australia, cancelled its contract with Allphones Group company, ARMS, to manage the Virgin Mobile branded stores.
The cancellation came into play by the end of October 2014. The Virgin Mobile stores generated sales revenue of $63 million in 2014, contributing $8.9 million to the group’s EBITDA against a total EBITDA loss of $5.5 million.
By the end of 2014, a new five-year dealer agreement had been signed with Vodafone and a five-year management agreement to manage Vodafone branded stores by ARMS was also signed. By year end, four Vodafone branded sites were operational, according to the report.
Throughout 2015, concerted efforts were made by management to generate new business sufficient to replace the Virgin Mobile revenues. A further 10 Vodafone branded stores were opened and the Philippines business expanded to 70 stores.
In December 2015, new management contracts were entered into by ARMS to manage ‘store within a store’ operations in eight Costco locations as well as managing the point of sale and inventory in 10 Huawei kiosks. A trial agreement to operate a “store within a store” in a number of Woolworths supermarkets was also signed.
In May 2015, the takeover of Glentel by a joint venture between BCE and Rogers, two large Canadian mobile networks, was completed.
According to the report, the partners in the Philippines business used the change of control provisions in the contract to terminate the operational involvement of Allphones by year end.
An agreement was subsequently signed to allow the remaining partners to use the Allphones brand, paying branding fees of $3 million over the following three years.
In April 2016, ownership of the Allphones Group group was acquired by Canada’s Skidmore. A new CEO and several new members of the executive team were subsequently appointed, and efforts were directed at turning around the loss-making Allphones Retail business, with the objective of making the group’s pre-tax earnings break-even by the end of that year.
As such, a number of new kiosks were opened, replacing stores that were operating with old fit-outs.
A new three-year branded stores agreement was signed between Allphones Group and Samsung in February 2016. Samsung planned to expand its retail footprint by opening up to 28 kiosks in Westfield shopping centres around the country. But although the new Samsung agreement increased revenue, it put significant pressure on working capital due to high stock balances and slow debtor recoveries, the administrators said.
In September 2016, the Costco contract was terminated due to continued operating losses, according to the administrators. Huawei also changed its approach to retail marketing at the time, closing its kiosks in the fourth quarter. Discussions were held with Vodafone to convert a number of Allphones stores to Vodafone branded stores.
In November 2016, Deloitte Financial Advisory was engaged to provide advice and forecasts on potential turnaround strategies.
Although revenues had increased during the year, a break-even operating result had not been achieved due to several factors: the failure of Samsung Note 7 handset, leading to two recalls, and the delayed availability of iPhone 7 to Allphones and Vodafone branded stores.
Also contributing to the Allphone Group’s troubles was its inability to reach an agreement with Vodafone on the conversion of Allphones stores to Vodafone branded stores and the financial collapse of the Philippines company using the Allphones brand, leading to non-payment of the branding fee.
In December 2016 and January 2017, Deloitte presented two turnaround strategies that would have required shareholder funding of up to $9.9 million. Both strategies had a high level of execution risk and would have required shareholder funding for an extended period.
In early February, following the review of the companies’ strategic options and future funding requirements, the Group sought confirmation from Skidmore of its intention to provide the continuing financial support needed to meet its future funding requirements, and to refrain from requiring the repayment of existing loans during that period.
“We understand that, during the (Canadian) weekend of 4 - 5 February 2017, Skidmore decided to no longer support the companies and that, upon being informed of that decision, the board of each of the companies determined that they could not continue to incur debts and appointed administrators on the morning of 6 February 2017 in Australia,” the report stated.
The Allphones Group’s financials over the past several years reflect the combined struggles it experienced in the lead-up to its administration.
Revenue declined from $141 million to $61 million from FY14 to FY16, following the cancellation of key contracts, most notably Virgin Mobile. The companies reacted to this by cutting direct costs and improving the gross margin percentage, but overheads remained high, the administrators said.
As a result, during the same period, EBITDA worsened from negative $5.5 million to negative $10.2 million.
“Our view is that the companies only became insolvent immediately prior to our appointment when Skidmore withdrew its financial support,” the report said, but added that the administrators “do not expect there to be any insolvent trading claims worthy of pursuit”.
Over the course of the administration period, the administrators have downsized the Allphones Group head office staff from 37 to seven and closed of 18 Allphones-branded company stores that were unprofitable.
Now, following the initial investigation and a call by the administrators to extend the convening period for the Allphones Group, Skidmore has stepped up with some fresh cash and a proposal for six deed of company arrangements for all but one of the companies in administration.
Skidmore is contributing more than $2.18 million in total across the six deeds, with the deed proposals containing several key features: payment in full of the entitlements of each employee of the companies and payment in full to licensees and franchisees of all licensee and franchisee commissions owing.
The cash is also intended to help deliver a return to all other external unsecured creditors of the companies greater than that they would receive via a full-blown liquidation of the Group.
The deed proposals also see Skidmore forego the claim for shareholder loans of $38.9 million, and provide the “prompt return” of Allphones Group to its directors through a creditors’ trust.
However, there are a number of assets still to be realised and liabilities still to be agreed and resolved, the administrators said.
“We are of the opinion that it is in the best interests of the creditors of each of the eight companies in respect of whom a deed proposal has been made, to vote in favour of the proposed deeds rather than a winding up,” the administrators told creditors.