Billabong bobs back above water

Any deal was probably a good deal for Billabong. But the Altamont recapitalisation offers a surprising amount of value and upside for the surfwear maker's embattled shareholders.

The sharemarket’s response to the proposed recapitalisation of Billabong that was unveiled yesterday signals a conviction that, in the circumstances, the board of the teetering surfwear company has struck a reasonable deal.

In the circumstances, of course, any deal that keeps the group afloat is probably a good outcome for shareholders who were otherwise facing a wipe-out, and while the Altamont consortium has used its leverage in the negotiations, the outcome leaves what might be regarded as a surprising amount of value and upside on the table for Billabong’s shareholders.

If shareholders approve the proposal the threat of an imminent implosion that would see the group end up in the hands of the US hedge funds that have bought its debt at a discount in recent months will be averted and, indeed, Billabong will have bought itself nearly 18 months of breathing space to get its house in order.

Moreover, existing shareholders will, rather than being completely wiped out, have a continuing exposure of between about 60-63.75 per cent to any improvement in their company’s fortunes and value.

The shareholders will be comforted by the prospect that poor Launa Inman, who never really got the opportunity to implement her turnaround strategy because of the incessant approaches from private equity groups, will be replaced by former Oakley chairman and chief executive Scott Olivet. 

The Billabong board has been very enthusiastic about the prospect that Olivet, with a long and impressive record at Oakley and Nike, could be brought into the business.

The other aspect of the deal positive for shareholders is that Altamont and its financiers will have real money on the table – nearly $400 million of it – and major incentives to stabilise the group and then turn it around.

Through a refinancing of Billabong’s $289 million of debt, a $70 million asset sale and issues of options and converting preference shares, the consortium will put up $395 million in exchange for the potential ownership of between 36.25 per cent and 40.49 per cent of the company. Two Altamont co-founders, Jesse Rogers and Keoni Schwartz, will join the board.

While the debt and preference shares are expensive by conventional standards – they carry an interest rate of 12 per cent – they are also flexible, with 'payment in kind' elements that would enable Billabong to pay some of the interest on the debt and hybrids in scrip if it feels the need to conserve cash.

The debt isn’t completely covenant-free – there is a leverage ratio that will be first tested in December next year – but there is also said to be considerable headroom in that ratio. Altamont has created a capital structure that is flexible and which should give Billabong the balance sheet and time to restructure.

Given the alternative – that Billabong would default on its existing facilities, now owned by US hedge funds Oaktree Capital and Centerbridge Partners, who were looking for a debt-to-equity swap that would have wiped out Billabong shareholders – the Altamont deal is almost generous in the circumstances and structured in a way that broadly aligns its interests with those of the existing Billabong shareholders.

Billabong may never be the $2 billion or so glamorous company that it once was, but there has been a lot of water under the bridge since then and the combination of its own management failures and the deep downturn in the external environments in the US and Europe has made it a very different business and one under severe threat.

At least now, if shareholders endorse the Altamont proposal, they might be able to salvage something meaningful from the wreckage. At least that possibility hasn’t been extinguished.

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