Billabong International must be under pressure to do a deal. The days of courting a string of private equity bidders are over - the ski and surfwear company is in need of some financial lifesavers.
After 18 months of show and tell, none of Billabong's would-be suitors have put their hands up for a full bid for the company, which continues to groan under the strain of poor sales and high costs.
The last two private equity contenders on Tuesday declared themselves out of the race to buy Billabong outright but remain in talks to take part in a capital restructure, which it appears would result in the winning contender becoming a lender to the company. Whether the loans would ultimately convert to a controlling equity stake in the business has not been addressed.
The talks are believed to involve the provision of debt at double-digit interest rates or a combination of debt and warrants that would be convertible into shares. It would also hinge on the company agreeing to asset sales beyond the divestment of Canadian-based West 49, which has already been announced.
For private equity players it's a less risky play but the terms will decide what the company's board can stomach. But there is still no guarantee even a revised deal could get over the line.
The share price fell 43 per cent to 25.7¢ when it started trading on Tuesday (having been in a trading halt since early May) and finished at 23¢ as investors fled the register, offloading 60 million shares. It's fair to say the company is reaching a crisis point and the $300 million of debt that seemed manageable six months ago could now be a problem. It is clear its bank lenders are supportive of a recapitalisation that would see their debt repaid.
At what point the bank covenants are breached depends on how much further Billabong's earnings deteriorate. This would determine whether the future of the company is for the banks or the board to decide.
Without a deal Billabong will be looking to engage in its own asset sale process and as a last resort would consider an equity raising.
Over the past year alone it has downgraded its earnings four times, and this does not take into account the close to half a billion dollars of asset writedowns over this period. The situation puts plenty of power in the hands of the two private equity funds attempting to stitch up a deal with the injured Billabong.
The two parties, Sycamore Partners (which has been working with former Billabong US manager and director Paul Naude) and Altamont Capital had been going through the Billabong books for almost six months - which they had been given access to after proposing indicative bids of 60¢ and around 30¢ a share, respectively. Sycamore originally offered $1.10 a share, which at the time was a big step down from the series of indicative offers a year earlier that started at $3.30 - and which was knocked back then by the board.
While the top bid would never have passed muster after due diligence this fairly recent history does provide insight into how steep the company's decline has been. It also raises the question of the kind of accounting protocols the board and the previous management had in place in 2011, 2012 and even earlier. But even today what lurks in Billabong's numbers was enough to make all the contenders baulk.
Yet another profit downgrade from Billabong on Tuesday and this sheds some light on its financial malaise. It revised its expected full-year earnings, before one-off financial items, to between $67 million and $74 million, down from its previous guidance of $74 million to $81 million.
Given it is only weeks away from signing the June accounts, investors can presumably trust these forecasts will hold. But what lies around the corner is something that has also spooked the market.
It's clear the board needs to bag a deal in the very near future or get on with its own capital restructuring. This appears to also be the view of chairman Ian Pollard, now expected to announce the company's future within weeks rather than months.