TPG tables second bid for Billabong

The Australian surfwear brand has received a new A$695m equity offer from TPG five months after it rejected a much higher bid from the US firm, a period in which its share price has plunged.

TPG Capital has tabled a new bid worth about A$695 million (€591 million; $728 million) in equity, or A$1.45 per share, for surf-wear brand Billabong, according to a statement from the iconic Australian business. TPG’s offer is for a 100 percent stake in the business.

The bid comes five months after it tabled an unsolicited A$3 per share bid worth about A$765 million for Billabong, which the company rejected. In a bid to shore up its balance sheet, it decided instead to offload a stake in accessories brand Nixon, selling 48.5 percent of the business to Trilantic Capital Partners, the Lehman Brothers Merchant Banking spinout, and 3 percent to the company’s management. The deal resulted in net proceeds of A$285 million.

Billabong sponsors seveal professional surfers

Since then, however, Billabong's share price has more than halved. A year ago, its stock was trading at A$5.95, before collapsing to A$1.88 in February, just before the company announced TPG's interest and plans for a strategic review. That news caused its share price to spike to A$3.13 by 1 March, before falling again to A$1.37 by close of trading on Monday 30 July.

TPG's new A$1.45 per share proposal represents a multiple of 6.6x to the company's EBITDA, according to Tim Montague-Jones, an analyst at Morningstar in Sydney. “We are of the opinion that is a very low multiple to pay for this business, which implies it is a low-ball bid or first bid,” he said. 

Billabong said its board has granted TPG permission to conduct non-exclusive due diligence on the business “in order to reduce the conditionality of its proposal and to improve its understanding and valuation of Billabong”.

Montague-Jones said, “We’d assume that after that process, TPG would come back with a higher bid.” Morningstar has valued the business at A$1.60 per share, which represents a 7.2x EBITDA multiple.

TPG and Billabong did not respond to requests for comment by press time.

TPG will set up a new private company to buy Billabong, Montague-Jones explained to Private Equity International. Its bid for the entire company would include the 16 percent stake currently held by Billabong’s founder Gordon Merchant. However, under the agreement Merchant would remain a shareholder by investing his proceeds back into the new company.

Merchant effectively blocked TPG’s previous offer to buy Billabong in February because he had sought a price of more than A$4 per share. TPG had offered A$3 per share, but for a lesser stake than the second proposal. The exact stake targeted in the first bid was unclear.

Montague-Jones said private equity is the perfect fit for the business, but a buyout comes with risk. “There is a lot of uncertainty as [Billabong's] revenues have declined significantly and there are some structural problems, for example with the [online] business. There is potentially a brand problem now where [people aren’t] paying a large premium for t-shirts and surfing, lifestyle-type brands [like] they used to.”

He continued, “The question is will it ever be able to return to generating the A$300 million of excess cash it did in 2009? Now it is only making about A$120 million in cash. If you use the A$300 million [figure], TPG is only offering 2.2x cash flow. If TPG can turn it around and regenerate that type of cash flow [again], they will make a lot of money out of the transaction.”