REDGroup was a private equity entity working towards a stock market float. What normally happens in these companies is quite simple and insidious at the same time.
1. Company gets bought by private equity company
2. If the company is cash rich, the cash is ripped out of the company
3. Cash rich or poor, the company is loaded up with the debt that was used to buy it
4. Private equity owners profit twice. Once from raiding the cookie jar, and secondly when the company is floated on the stock market.
This system works well while credit is cheap, just as it was before the GFC, and is quite lucrative like the abortive raid on QANTAS showed. However, when credit dries up, companies are left groaning with the weight of the debt left by the PE raid.
And the report I saw in the SMH has Liabilities higher than Assets. Without looking at the books, this mean that there is a lot of loans or inability to convert inventory to cash, or declining shareholder equity. Or all three. Or even deeper structural issues that will take months to discover.
For a market to be in, the book retail rates as one of the suckiests. Especially in Australia. Publishers do not really care for booksellers, they make much of their money selling trade paperbacks in bulk in large retailers like Coles and Woolworths. Even large retailers like REDGroup are second in the food chain. Given the high margins that publishers expect and demand, the slowness of adopting electronic distribution, and the fact that Amazon and Book Depository are killing the local marketplace with extremely cheap books that are postage and GST free.
And music and DVD sales are also declining, with electronic downloads and competition from other sources like internet, video games and what not, means that every product that Borders and A&R sold had declining sales.
Most of the locations that Borders and A&R in can not be cheap. The local Borders takes 3 floors with its own lift and coffee shop in Westfields, and while A&R is an order of magnitude smaller, it is still in Westfields. In order to make money in Westfields, you need to have high margins or high turnover, preferably both. Add staff costs, taxes and compliance costs, a traditional retailer does have a harder time competing with online retailers as the built in costs are higher.
So if you are not getting your income, the costs generally stay the same (you can reduce some of it by sacking staff, but you do not get the benefit financially for a while. It is cheaper to have staff resign). And if your income can not pay for your costs, that is the classic definition of insolvency in Australia
The best that REDGroup can hope for is to be allowed by creditors to take a Deed of Company Arrangement under the Corporations Act 2001, where creditors get a dividend (could be 100%, sometimes it can be as low as 5% of the debt) and the company continues. The worst case scenario is that the company is liquidated fully. I expect that a Deed may be executed, but I also see the business broken up or the company slashes many stores (including the more expensive Borders stores), and the e-book business sold as a going concern.
It is hard to tell what will happen, even Ferrier Hodgson will not know until it can tell the creditors what the true state of affairs is, when the company actually became insolvent, and if there is any preferential payments that can be claimed back.