Wipeout at Billabong?

Two private equity-led consortiums have dropped buyout offers for the ailing Australian surf-wear retailer, which is outlining refinancing plans that could wipe out shareholders.

Discussions between two private equity-backed consortiums and Australian surf-wear brand Billabong have deteriorated, with the company resuming trading on the Australian stock exchange, according to a company statement. 

Subsequently, the two private equity firms involved in the rival bids, Sycamore Partners and Altamont Capital Partners, have entered into discussions regarding proposals for alternative refinancing and asset sale transactions, the proceeds of which would be used to repay in full Billabong’s existing syndicated debt facilities. 

The Sycamore group, which included Billabong board director Paul Naude, 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. The rival investor group, comprised of San Francisco-based Altamont and apparel conglomerate VF Corporation, originally matched the A$1.10 offer, but later decreased its bid to just A$0.50.

“The refinancing is intended to provide the company with a comprehensive solution and an appropriate capital structure, allowing it to continue its reform agenda. It’s our intention to conclude these discussions as soon as practically possible while aggressively reducing costs across all our global operations,” Ian Pollard, chairman of Billabong, said in a statement. 

Although the exact terms of the refinancing discussions have not been revealed, shareholders could face being wiped out if the company continues to deteriorate, according to Tim Montague-Jones, senior equity analyst at Morningstar. 

The private equity firms’ decision to take control of the business through debt rather than equity suggests the company is continuing to struggle to repay its debt and will offer the potential senior lenders more downside protection in the deal. 

“There is no detail on how the refinancing will be restructured, but we saw what happened with channel Nine, and how the private equity groups effectively transferred their debt into equity and wiped out the equity holders. There is a risk if you are a current [Billabong] shareholder that you could get wiped out in any of this restructuring if Billabong continues to deteriorate. I’m sure there will be some clauses or options to convert the debt into equity,” Montague-Jones told Private Equity International.

We're telling people to stay well-clear even though it looks cheap on a P/E multiple, it is at around 3.8x so it looks excessively cheap. But we're saying that equity holders could get wiped out if there is a
recapitalisation.

Tim Montague-Jones, senior equity analyst, Morningstar

In October last year, CVC Capital Partners ceded control of Australian media group Nine Entertainment to senior lenders Apollo Global Management and Oaktree Capital Management as part of a $3.4bn debt-for-equity swap, representing the Asia-Pacific region’s biggest ever private equity write-off.

Montague-Jones explained Billabong now needs about A$150 million to give it breathing space in order to cut the cost structure and try and improve its revenues. “At the moment it seems the business is deteriorating to the point where it doesn’t have that breathing space and I believe the banks are going through the business. I would imagine that there is concern about lending covenants so it is very difficult for the company to progress from here until that debt gets resolved.”

He added, “We’re telling people to stay well-clear even though it looks cheap on a P/E multiple – it is at around 3.8x – so it looks excessively cheap. But we’re saying that equity holders could get wiped out if there is a recapitalisation.”