Aussie icon to dance to tune of US saviour
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.
Frequently Asked Questions about this Article…
The US private equity firm Altamont will step in as Billabong's biggest lender, charging about a 12% interest rate and holding the option to convert its loans into shares. Altamont will install a new chief executive, take two board seats and acquire the DaKine brand for $70 million. The deal gives Altamont an eventual controlling stake of roughly 40% and aims to stabilise a company that was heavily indebted.
Existing Billabong shareholders will be diluted as part of the rescue package. Founder Gordon Merchant, previously a major shareholder, will be reduced to less than 10% ownership. While the deal avoided receivership and prompted a 34% surge in the share price as investors reacted, shareholders did not receive the usual takeover premium and face dilution risk if Altamont converts loans into equity.
Scott Olivet is the incoming boss named by Altamont. He is a former chairman and CEO of Oakley Inc and was once a senior manager at Nike. Investors appear reassured by his credentials and industry experience in turning around consumer and sports-related brands.
Altamont will acquire Billabong's DaKine brand for $70 million as part of the overall rescue package. DaKine was one of the brands Billabong had been focusing on under the previous management strategy.
Altamont becomes Billabong's biggest lender with loans carrying a hefty ~12% interest rate and the option to convert those loans to shares. That combination gives Altamont both strong creditor rights and a path to significant equity control if it chooses to convert, and the value of that position improves if Billabong's share price rises.
Launa Inman, who had been CEO for just over a year, was removed as part of the deal. During her tenure she received a $1.3 million base salary, a potential short-term incentive of up to $1.3 million, and a long-term incentive of up to $614,000. Her contract also allows for an additional $1.3 million payment in the event of a 'fundamental change' at Billabong, which this transaction is likely to qualify as.
Billabong was burdened with excessive debt and a soft retail environment, leaving it in a weak negotiating position. The bank lending syndicate had already sold loans to US hedge funds at about 85 cents in the dollar, and the company risked being taken over or put into receivership. The Altamont package provided fresh lending, board and management changes, and an immediate buyer for assets like DaKine to avoid collapse.
Investors should monitor several things: whether Altamont converts loans into equity (which would further dilute existing holders), strategic direction under Scott Olivet and the new board representatives, any further asset sales or brand rationalisation, and how effectively the new owners address Billabong's excess debt and past strategic mistakes. These factors will influence the share price and the company's long-term recovery.
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