Billabong tussles with PE groups on pricing

The struggling surf-wear retailer has extended its suspension of trading on the Australian Stock Exchange as it considers lowered bids from two private equity-backed groups.

Billabong has extended the period of its trading halt on the ASX “so that the company can continue negotiations in relation to the process announced on 14 January 2013”, according to a letter from its company secretary to the exchange dated 4 April 2013. Billabong did not respond to requests for further details. 

The process in question refers to take-over bids submitted by two private equity-backed consortiums, including one led by Billabong board director Paul Naude. Sycamore Partners Management and Bank of America Merrill Lynch join Naude as cornerstone equity investor and lead debt financer respectively, a previous Billabong document stated. 

The group originally offered to acquire all company shares in Billabong for A$1.10 (€0.89; $1.15) cash per share, the company previously revealed, although this has reportedly been decreased to A$0.60 per share. 

A rival investor group, comprised of San Francisco-based Altamont Capital Partners and apparel conglomerate VF Corporation, originally matched the A$1.10 offer, but later decreased its bid to just A$0.50, according to the Australian Financial Review

“[The extension] implies that they haven’t come to a deal. We would say there would be a high likelihood that a deal will be done and assume the board is looking for a higher price – obviously the price is the sticking point,” Tim Montague-Jones, senior equity analyst at Morningstar, told Private Equity International. 

He explained that the backing of Billabong founder Gordon Merchant, who owns 16 percent of the business, is critical to the deal. “He would either have to join the winning consortium by tipping in his equity or agree to the consortium and sell out. He has known Paul Naude since day one so I think that gives them a slight advantage and it’s likely he would join the consortium in any sort of deal.”

Morningstar believes there is too much uncertainty and risk surrounding Billabong to recommend investors to pour cash into the business. High-end retail businesses have suffered since the global financial crisis as consumers aren’t willing to pay premium prices for lifestyle-branded products. 

“[Billabong] has expanded aggressively by acquisition from being a wholesaler to becoming a retailer by acquiring retail outlets and has been highly leveraged,” Montague-Jones continued. “There is a lot of simplification required and the current management is simplifying it by cutting a number of brands and products, [for example] most of their sales come from about 20 percent of their designs. This fixes the cost but also they need to fix the revenue line and to date their revenue lines continue to decline.”

He continued, “For a business like Billabong, the sensible place for it to be is in private equity hands. It can then completely restructure itself from the ground up and come to the market once it’s been proven to generate reasonable returns on capital.”

For a business like Billabong, the sensible place for it to be is in private equity hands

Tim Montague-Jones, senior equity analyst, Morningstar

The troubled surf-wear company has previously received serious interest from private equity firms including TPG Capital and Bain Capital.

In October last year, TPG Capital withdrew its offer to acquire 100 percent of the business. In July, TPG had bid about A$695 million (€591 million; $728 million) in equity or A$1.45 per share for Billabong, representing a multiple of 6.6x EBITDA, PEI reported earlier. Bain Capital also entered the bidding process last September, but walked away from the deal weeks later, according to local media. 

“I’m sure it is a big blow for the management involved. I know that [chief executive] Laura Inman is currently trying to appoint some key executives in the company and obviously she is finding it impossible to appoint people when there is so much uncertainty surrounding the business with private equity groups coming in and doing due diligence,” Montague-Jones added.