Aussie icon to dance to tune of US saviour

The 1970s surfer turned entrepreneur, Gordon Merchant - who founded surfwear company Billabong - will soon be marching to the beat of US private equity company Altamont, which has stepped in to rescue a company that was drowning in debt.

Merchant will no longer be Billabong's major shareholder as part of this deal - he will be left with less than 10 per cent, compared with Altamont's eventual controlling stake of about 40 per cent.

Merchant's stake will be diluted, as will those of all existing Billabong shareholders, casualties of a deal that needed to be done. Billabong, struggling to survive under a mountain of debt, was in a very poor negotiating position, leaving it vulnerable to be picked off by the least unattractive of the many suitors that had done the numbers on the company.

The bank lending syndicate had already fled the scene and sold their loans at about 85¢ in the dollar to US hedge funds that were threatening to take control of the company by converting their debt to equity.

Under normal circumstances a change of control results in investors receiving a premium for their stock. In Billabong's case shareholders must be grateful the group has not landed in the hands of receivers. So parlous was its situation that the reprieve sent the market into a frenzy with almost a quarter of Billabong's shares changing hands - its share price shot up 34 per cent.

Altamont got a pretty good deal and one that improves as Billabong's stock price climbs.

The US private equity firm will initially become Billabong's biggest lender, receiving a hefty interest rate of 12 per cent and having the option to convert the loans into shares. But there is more. Altamont installs its own choice of chief executive and puts two representatives on the board.

Having said this, investors seem pleased about the credentials of the incoming boss, Scott Olivet, a former chairman and CEO of Oakley Inc and once senior manager at Nike.

Altamont will also acquire Billabong's DaKine brand for $70 million as part of the overall package.

Billabong's current chief executive, Launa Inman, who has been in the job for just over a year, is churned, but her consolation prize is not insignificant. During that period she received $1.3 million in base salary, a potential short-term incentive payment of the same amount, and a long-term incentive of up to $614,000.

Under the conditions of her contract she can receive another $1.3 million in the event of a "fundamental change" at Billabong. And this deal should qualify.

Inman's ability to turn around the troubled surf/ski group has always been questioned by analysts. However, her ability to stage any major turnaround at Billabong has been hampered by having to spend time dealing with proposals from various private equity groups that have been running the ruler over the company.

It can't have been easy. Over the past six months she has been negotiating a deal that if successful would leave her without a job.

Chairman Ian Pollard said that his first day on the job (last year) was marked by an offer from a private equity firm, Sycamore, which was led by one of Billabong's own directors, Paul Naude.

If he survives the board renewal there will be a chance to actually take a look at the business. "It would be delightful to spend time in the stores rather than in the boardroom and the data room," he said.

Inman's strategy of paring back product lines, reducing the retail store numbers, and cleaning up the supply chain and distribution were all sensible measures. Under her management the company was also attempting to undertake some asset sales.

She was going to direct the focus on three key brands - DaKine was one of them. It will be interesting to see whether the new management diverges much from this plan.

Billabong is now largely an international company with a stable of brands - some of which are in need of attention/nurture, and I would include the flagship Billabong brand in that category.

Excessive debt and a soft retail environment are not its only problems. The new majority owners may need to unpick many of the initiatives (read mistakes) undertaken over the past five years.