Billabong has faced a challenging year

Billabong has faced a challenging year

For all of the suitors circling Billabong, the Australian surfwear brand is yet to see much action. With four bidders showing interest over the past year, Petah Marian looks at why none of the interest has so far turned into a deal.  

Billabong has had a tumultuous year, receiving four bids and reporting three profit warnings, a management shake-up and a transfomation strategy over the past 13 months.

The turmoil began in December 2011, when the company issued the first of the profit warnings, highlighting slowing sales, particularly in Europe and Australia.

In February, it received a bid from private equity firm TPG Captial that valued the company at AUD765m. The initial AUD3 per share bid improved to AUD3.30, which was then knocked back by the surfwear label.

At the time, major shareholder and non-executive director Gordon Merchant, and non-executive director Colette Paull, said they did not support Billabong "taking any steps to assist or facilitate a proposal by TPG Capital, including due diligence on Billabong, even if the price TPG Capital offered was AUD4.00 per share." Even this, they said, would "still represent a discount on the true value of Billabong shares".

Yet, the brand re-opened its books again to the same private equity firm when it submitted an AUD1.45 per share bid, valuing the company at A$694m at the end of July. TPG dropped that bid in October. In the interim another unnamed bidder, rumoured to be Bain Capital, also made an AUD1.45 per share bid for the brand, which it quickly dropped.

Now, the former head of Billabong's Americas business, Paul Naude, has teamed up with US private equity firm Sycamore Partners, offering AUD1.10 per share. And this week the bid was matched by a consortium made up of VF Corp and Altamont Capital Partners. The VF Corp/Altamont bid would see the brand split up, with the apparel giant taking on the Billabong brand and Altamont taking on its other brands and assets.

Beyond the bids for the business, Billabong has sold a stake in its Nixon brand, sought to raise AUD225m through a share issue, and named former Target Australia managing director Launa Inman as CEO. In turn, Inman set out a transfomation plan in August as the company saw full-year net profit slide 71% to A$16.1m.

Due diligence disquiet
For all the interest in the brand, none of the bids has progressed beyond due diligence. And until now, there has not been much discussion as to why this has been the case.

According to UBS analyst Ben Gilbert, the "lack of commentary as to why discussions ceased has not only fuelled concerns over the severity of the issues already known to investors, but also given rise to fears over issues not yet appreciated by the market".

He suggested there are three reasons that could be causing potential buyers to shy away: the state of the Billabong brand, excess inventory, or another issue that has been discovered during due diligence, but remains unknown to the market.

Gilbert suggested some 15 unknown reasons that might have emerged during due diligence that would have led previous bidders to walk away from the negotiating table. The most likely concerns, he said, were that they don't believe the company's 2016 FY financial targets and they don't believe in the ability to revive the core Bilabong brand.

This was followed by issues of price and inventory - especially that volumes might be larger than understood by the market. He also suggested there could be a view that is a "bearish outlook on macro backdrop across key Billabong regions", or that investors could not get comfortable with the business model or strategy following due diligence, or even that there might be limited scope to gear up.

Additionally, he speculated that there might be concerns over whether the group would be able to stay within its AUD80m capex target, concerns over the management team, the investor's exit strategy, the Nixon agreement, the ability to exit more store leases, the company's vertical structure, and the impact of its retail footprint on wholesale agreements, sponsorships and earn-out agreements.

Takeover talk uncertainty
Yet many industry watchers, and potentially the management of Billabong itself, believe a turnaround might be better managed away from the scruitiny of the markets.

However, Citi analyst Craig Woolford is cynical that any bid will be accepted at AUD1.10 per share.

"The board of directors at Billabong has yet to make its position clear. It's awkward. The board felt AUD1.45 undervalued the company only a few months earlier," he said, adding that the renewal of the board and appointment of a new chairman is a "positive angle".

Of the bids to date, the VF Corp/Altamont one is the most likely to proceed, suggests Gilbert, due to the operational synergies that might be found between Billabong and VF Corp which has a strong presence in the outdoor and action sportswear sectors.

He notes that its strong focus on outdoor and action sports, combined with its operational excellence and retail experience, makes it the strongest contender for the surfwear brand thus far.

For Inman, who is trying to turn around the business, the constant interruption of takeover talk must only be unsettling.

Speaking to Smart Company in November she reportedly said: "I'm glad the decision has been made one way or the other - it's not easy living with uncertainty. It does take its toll, and I've really endeavoured to keep the team and myself as focused as possible.

"It was a testing time, but now we've got to get on and focus on the business."

Yet, with VF Corp and Sycamore Partners' due diligence set to continue until March, there are at least six more weeks of uncertainty ahead.