Billabong board balances the bids

Investors in Billabong will need to wait a little longer while bids for the company are reviewed.

Summary: A formal bid for Billabong could finally come tomorrow. VF Corporation and its backers Altamont Capital, and former US head Paul Naude and Sycamore Partners, have both said they are interested.
Key take-out: If offers by both companies are rejected, Billabong is almost certainly out of the takeover picture.
Key beneficiaries: General investors. Category: Portfolio management.

Billabong (BBG)

The Bells Beach surfing pro may have wrapped up for another year, but the action continues at surfwear retailer Billabong.

Last week I wrote that the two private equity partnerships conducting due diligence were due to submit bids. I have rung around this week, and there is no doubt that both VF Corporation and its backers Altamont Capital, and former US head Paul Naude and Sycamore Partners, have said they are both interested. However, the profit downgrade and potential need for further capital injection means neither is going to offer $1.10 a share.

The question is then, how much? From what I have heard, and this is only rumour, Naude’s proposal is at 85c a share, and the others have bid 80c. Remember this is purely rumour and everything is still being negotiated, so it’s hard to say what numbers will eventually emerge. The stock is currently at 73c, but it’s not trading at the moment anyway while the talks continue.

I said a week ago that I thought offers of about 90c were likely, but, regardless of the exact numbers, the big issue is going to be whether the board will recommend it. That aspect is not clear at all.

Founder Gordon Merchant is apparently undecided at this price, but if they needed to raise money he would have to dip his hand into his pocket again and all he really has are his Billabong shares. Merchant also has a lot less influence than he used to, though he still owns about 14% of the company. I think the directors would now realise they have to do the right thing by the whole company and all the other shareholders. The problem the board faces is if Merchant says no, then they can’t get to 90% acceptances – but you could still get 75% if they do it via a scheme of arrangement, which they almost certainly would.

All this shapes up to not a very satisfactory outcome. In the absence of a bid, if the company does have to raise more money, the stock could easily go back into the 60s again. My sense is that, apart from Gordon Merchant, the board would like to be done with this. It is causing so many headaches and – even with signs of a retail resurgence – it is not helping Billabong at the moment. If these offers are rejected, Billabong is almost certainly out of the takeover picture. There would just be so many rejected offers and suitors walking away.

At the moment I’m hearing bids at 85c and 80c, but the situation should be made clearer tomorrow.

Australian Infrastructure Fund (AIX)

Despite the potential legal challenge from AustralianSuper, and a rising share price, this continues to look like a good deal.

I looked at some research this week suggesting the deal is likely to go ahead in its current form, but it also attempted to quantify what AustralianSuper’s claim might be worth. The bottom line is that, taking into account the size of the stake and different calculations of airport equity valuations, it’s hard to see the claim amounting to more than $18 million. That would only knock a couple of cents off returns, and in the scheme of things it’s not a lot of money. Furthermore, AustralianSuper hasn’t actually launched a law suit yet. It has sort of threatened to do it, but I suspect it just wants some sort of compensation, which could well be even less. I have a feeling that this could be settled for an amount of money which would not affect shareholders’ interests greatly.

AIF closed at $3.08 today, which is getting a little high when all the risks are factored in. Assuming the worst case scenario, you’ll get $2.95 in a few weeks, then 24c plus a few cents of franking credits. That means I’d say $3.06 is about the right amount to pay at the moment, and probably no more than $3.08.

I don’t think the risk is particularly high with the trade, but remember that if it gets much higher there’s only 3-4% to be made. That’s still a fairly decent deal.

Sundance Resources (SDL)

The Sundance deal is definitely dead.

There are reports around that the company is looking to deal with other Chinese firms, or that a large commodities player might be interested. It’s not impossible, but this is not something I would buy on that prospect. This project needs billions of dollars spent on it, so it’s not generating any returns in the meantime, and this is not something I’d be happy to own in the absence of a bid. I think if anybody else was going to come in, they would have by now.

M2 Telecommunications (MTU), Macquarie Telecom (MAQ), iiNet (IIN)

M2 has seen a sharp run-up in its share price lately after it announced the proposed acquisition of Dodo and Eftel, and this really just goes to a point I have made from time to time recently. (see Building value at Thakral and Follow the money). I think second tier internet provider consolidation just seems inevitable.

All these companies will soon essentially have the same broadband product to sell, so getting customer numbers and size is going to be the ultra-important thing.  Anybody can build up size at the moment that is going to be worth more in the near future.

The two obvious ones are Macquarie Telecommunications and iiNet, and from those I prefer iiNet because it has more of a consumer focus. Macquarie was more business focussed, but it is now buying consumer businesses which shows what direction these companies are focussing on. Both could also definitely be buyers, and it’s hard to know exactly what will happen, but the point is this space is going to become more valuable.

Whether the buyers, or being bought, the second tier consumer telco space looks good at the moment – particularly a pure play like iiNet.


Tom Elliott, a director of Beulah Capital and MM&E Capital, may have interests in any of the stocks mentioned.

Takeover Action March 28-April 3, 2013

DateTargetASXBidder(%)Notes
13/02/2013Central Australian PhosphateCENRum Jungle Resources0.00
16/03/2103EftelEFTM2Telecommunications Group19.90Pre-bid arrangement
7/03/2013EngencoEGNElphinstone Group64.35
27/03/2013Firestone EnergyFSERange River Gold5.55
22/03/2013Gujarat NRE Coking CoalGNMJindal Steel & Power28.79Ext to Mar 29
8/03/2013LinQ Resources FundLRFIMC Resources97.35FIRB approves. 
28/03/2013Neptune MarineNMSMTQ Corp84.37Unconditional. Closes April 5
18/02/2013United OrogenUOGIron Mountain Mining22.93Unconditional
Schemes of Arrangement
24/12/2012Avocet ResourcesAYELion One Metals0.00
11/03/2013EndocoalEOCChina Yima Coal/Daton Group0.00Effective Apr 22
8/03/2013Kumarina ResourcesKMRZeta Resources0.00Vote May 7
22/03/2013Norfolk GroupNFKRCR Tomlinson0.00
3/04/2013Sundance ResourcesSDLHanlong Mining Investment17.99AFR: Takeover talks may be terminated.
Foreshadowed Offers
27/03/2013BerkleeBERDirector Rick van Berkel0.00To buy the business
21/03/2013Billabong InternationalBBGAltamount/VF Consortium0.00Indicative proposal in process
19/12/2012Billabong InternationalBBGExec Paul Naude Consortium0.00Indicative proposal in process
4/12/2012GraincorpGNCArcher Daniels Midland19.90Revised indicative offer
5/03/2013Westside CorpWCLUnnamed parties0.00Discussions continue
28/02/2013WHK GroupWHGSFG Australia0.00Non-binding indicative proposal. Discussions continue

Source: NewsBites