UPDATED: SurfStitch supporters say turnaround still possible
SurfStitch’s administrators have doubled down on their recommendation to creditors to approve EziBuy’s offer to take over the floundering surfwear company, even as SurfStitch co-founder Lex Pedersen is urging creditors to support the new deed of company arrangement (DOCA) proposed by non-executive director Abigail Cheadle last week.
“If it is set on that path, I am willing to reinvest in that. The turnaround is possible. It just needs to happen quickly – enough is enough,” Pedersen told Internet Retailing last week.
Pedersen believes the administration process has inflicted unnecessary damage on SurfStitch.
He acknowledged that SurfStitch was not exactly thriving when directors appointed John Park, Quentin Olde and Joseph Hansell of FTI Consulting as administrators in August last year, but maintains administration could have been avoided.
“The business was clearly under pressure – there were fires on several fronts – but I do believe that administration could have been avoided. It’s crippling for the business and needs to end immediately.”
Cheadle, who joined the board last March as part of a renewal process led by chairman Sam Weiss, noted that SurfStitch was solvent when the board appointed administrators, a decision she didn’t support at the time.
“All I can say is that Sam Weiss, [former CEO] Mike Sonand and [director] Harry Hodge voted to put the company into administration when it was solvent. I abstained and wrote a two-page statement as to why,” she told Internet Retailing.
Cheadle, a forensic accountant with a background in restructuring companies and countries such as Russia and Iraq, said the company could have been restructured by selling assets and continuing on trade credit with suppliers.
She said she wasn’t concerned about the two shareholder class actions SurfStitch was facing – one of the main reasons the board gave for appointing administrators – since similar class actions in Australia had all been settled out of court.
“Instead, [going into administration] has cost $7 million in administrative and legal fees and other costs,” she said.
She said she tried to minimise these costs by proposing a DOCA soon after administrators were appointed in order to return as much value as possible to shareholders.
“The motivation behind what I’m doing is very pure. I’m a non-executive director whose job it is to service the shareholders. I don’t take that job lightly. When the company was put into administration when it was solvent, I reacted in a way to return as much to shareholders as possible,” she said.
In their long-awaited report to creditors, however, administrators recommended a competing DOCA put forward by multi-channel retailer EziBuy, which they said offered a better return to all creditors, including shareholders involved in class actions against SurfStitch.
Cheadle last week sent a revised DOCA to shareholders, which gives class action creditors the same deal they would get under the EziBuy DOCA and uses different valuations to calculate a higher estimated return to creditors.
The administrators on Tuesday provided a second report creditors, stating that their opinion remains unchanged.
“Despite receipt of the Second Cheadle Group Proposal, the EziBuy Proposal is superior and results in a better return to creditors,” the administrators said in a statement.
SurfStitch’s leadership are split over the two DOCA proposals. Pedersen and managing director Justin Hillberg have voiced their support for Cheadle’s proposal, while Sonand is backing the EziBuy proposal.
“I can see how the EziBuy deal is good for their group, but I don’t necessarily think it’s the best move for SurfStitch and its stakeholders,” said Pedersen, who left the business last year due to frustrations with the board’s cost-cutting approach.
“Abigail doesn’t want to run the business, she’s here to restructure it and set it free, that is her pedigree, as opposed to a fire sale. She’s got her heart in the right spot, there’s no greasing the wheels with her,” he said.
Whether creditors are willing to set SurfStitch “free” remains to be seen. Critics of the Cheadle DOCA have argued that SurfStitch has already proved it cannot be trusted to deliver a return to shareholders.
Cheadle said the next iteration of SurfStitch would be different, since she would appoint a new board of directors, who are experts in running e-commerce companies, including Booktopia CEO Tony Nash.
Nash told Internet Retailing he would bring his experience bootstrapping a $100 million business to act as a sounding board for the company.
“SurfStitch was a great business, it still is a great business and it will be a great business again,” he said.