Advisers, consultants skim off $23m in fees

The attempts to revive Billabong's financial fortunes have been lucrative for a number of advisers and consultants who in the 2013 financial year harvested $23.3 million in fees from the cash-strapped surfwear company.

In delivering its shocking bottom-line loss of $859.6 million, Billabong revealed it had spent this money on advice for restructuring regional finances, supply chains and corporate advice - money that chairman Ian Pollard freely admitted he would rather have spent elsewhere.

But it is a company at the mercy of an army of external experts. It paid former chief executive Launa Inman up to $4 million for 14 months' work, which covered yesterday's result.

She is not to blame for any of Billabong's problems and neither are the consultants. The trouble is that there is not sufficient evidence yet that the company has hit on the right formula for a turnaround. And right now it is beset with uncertainties, both ownership and financial.

The company's accounts show that the Billabong brand is now valued at zero (compared with $252 million last year). Other brands with no book value include Element, Palmers and Beachculture.

Billabong's full-year result illustrates clearly why the private-equity vultures gave up trying to buy its shares and instead turned their attention to playing with the retailer's distressed debt.

The company had no choice, thanks to accounting rules, other than to write down the value of its intangible assets (among other things). In other words the value of many of its brands (such as Billabong) or investments (sunglasses group Nixon) has been slashed or cut to zero. The value of Billabong International's net equity has moved from more than $1 billion in June 2012 to $267 million at June 30 this year.

The sharemarket values the company at even less - about $244 million (based on a share price of 51¢).

Countless numbers of private-equity investors (mainly from the US) have trawled over Billabong's books in the past two years - and until a few months ago all had walked away. Over this period it has been a race to the bottom on these proposed offers.

When the company was in breach of its lending arrangements midyear, two US hedge funds that specialise in circling distressed debt - Oaktree and Centerbridge - bought Billabong's debt from the bank lenders.

This consortium is now in a race with another private-equity-based consortium, Altamont, to stitch up a deal with Billabong. Both are pitching a deal that first supplies the troubled surfwear company with expensive debt, some of which will be convertible into cheap equity in Billabong over time.

As lenders with security the risk of this deal for both predators is mitigated. And if they are successful in resurrecting Billabong's fortunes there is a lot of equity upside.

Pollard said the board was keen to made a decision as soon as possible. On the face of it the Centerbridge/Oaktree deal looks a little more attractive. But Pollard made it clear he had latitude to include other aspects.

"In addition to the economic and financial terms the board will consider all other relevant aspects including things like management, strategy, alignment with the board, governance, construct certainty, conditionality and timing," he said.

His language suggested the board still had some concerns about the Centerbridge/Oaktree proposals. Some aspects were "yet to be clarified".

My money would be on Altamont to get across the line. It already has a good relationship with the board and a well-credentialled chief executive (already working with Billabong as a consultant).

What is clear from Billabong's latest numbers is that it must complete a deal fast. Its business continues to deteriorate, it has no chief executive and no ability to execute a turnaround strategy.

The full-year loss came in at $859.5 million, including a hit of about $600 million to the value of brands. Another couple of hundred million in losses was booked on fixed assets and inventory.

The company needs to get rid of a large part of its $500 million in debt or its balance sheet gearing places it in a particularly precarious position. This is its immediate concern.

Then comes the task of restoring the business that has been financially and operationally challenged for several years. Global sales were down 13.5 per cent in the year to June 30 and most disturbing was the 5.7 per cent revenue decline in the US where the retail market has been picking up generally.

Australian revenue was also down but the company has made some headway in cleaning up its loss-making store numbers.

The company continues to get no help from the European assets, which are now (slightly) loss-making with revenue declines of about 10 per cent.