The proposed recapitalisation of Billabong International is a step closer after the deal with the Altamont consortium was reconfigured to avoid a declaration of unacceptable circumstances from the Takeovers Panel. There’s now a window of two or three weeks in which it could be blown up.
Billabong and the Altamont consortium were forced to restructure the deal they agreed a month ago after two US hedge funds which own about $300 million of Billabong’s debt complained to the Takeovers Panel. Oaktree Capital and Centerbridge Partners tabled their own recapitalisation proposal with Billabong just after it had committed to Altamont.
The original deal with Altamont was quite complex and had some quite controversial features but was considered a good outcome for the company and its beleaguered shareholders given the financial pressures Billabong was under and the urgent need for it to resolve them (Billabong bobs back above water, July 17).
In broad terms, Altamont proposed to refinance $US294 million ($325.57 million) of Billabong debt, buy an asset for $70 million, and subscribe for options and preference shares that, if exercised, would have given it up to about 41 per cent of Billabong’s capital. It provided a $US40 million bridge facility in advance of the long-term funding package.
The panel took exception to a 20 per cent termination fee on the bridging facility in the case of a change of control before January 15 next year; a 35 per cent interest rate on a $US40 million tranche of the longer-term funding if shareholders didn’t approve the equity elements of the deal; and a condition that the long-term funding had to be repaid in the event of a change of control and a "make whole" premium of 10 per cent if the loan were repaid within two years.
The panel, not surprisingly, took the view that the termination fee acted as a "lock-up" device; the 35 per cent rate on the $US40 million tranche was likely to coerce Billabong shareholders into approving Altamont’s acquisition of a controlling interest in their company and that the "make whole" premium might deter rival proposals.
It informed Altamont and Billabong that it intended to make a declaration of unacceptable circumstances, so they went off and renegotiated the deal to strip it of its "poison pill" elements.
Instead of the termination fee there is now a simple $6 million break fee and, broadly, the other objectionable features have been removed, with Altamont getting equivalent value through a higher interest rate on its debt and a lower exercise price – indeed, a nominal price of a cent has been applied to the options it will receive. The panel has responded by saying it won’t make an adverse declaration.
It would appear reasonable to assume that, having been motivated enough to take the original deal to the panel, Oaktree and Centerbridge, now that poison pill elements of the deal have been removed, will look at tabling a new proposal with Billabong.
If they do, they haven’t got a lot of time. Billabong said today it now intends to negotiate the definitive documentation for the term loan component of the revised deal "as soon as reasonably practicable", which it said was likely to be two or three weeks.
The equity components of the deal – the options and preference shares – will require shareholder approval, but the term loan commitment isn’t conditional on that approval, suggesting the hedge funds have only the next two or three weeks to make their move. The Billabong board still intends to recommend the equity issues to their shareholders, providing there is no superior proposal available.
The hedge funds’ original proposal involved less – and less costly – debt than the Altamont deal but a debt-for-equity conversion that would have given them 60 per cent of Billabong’s capital. Under the revised Altamont deal it appears it could have up to about 45 per cent of the group.
The one aspect of the Altamont deal the hedge funds would have difficulty matching, if they chose to have another tilt at Billabong, is the presence of former Oakley chairman and chief executive and Nike executive Scott Olivet in their proposal.
Olivet is already effectively acting as chief executive of Billabong International even though his appointment hasn’t been finalised – former chief executive Launa Inman went at the start of this month – and has impressed everyone from the board down.
He has made it clear that he won’t stick around if Altamont is outbid and, given that both the Altamont proposal and the initial approach from the hedge funds left Billabong’s shareholders with a significant exposure to the group’s future performance, that could provide a meaningful – even decisive – advantage for Altamont in any contest for control.