Billabong equity holders' nuts in a vice

Billabong has become the latest target for takeover by debtors. Shareholders beware.

It is a quote often incorrectly attributed to beloved former US President Teddy Roosevelt.

“When you’ve got ‘em by the balls, their hearts and minds will follow.”

Regardless of its origins, it now has become the strategy du jour in corporate manoeuvres where takeovers in distressed companies revolve around debt rather than equity.

The latest target is Billabong International. And anyone who has snapped up scrip in the surf manufacturer and retailer in recent weeks in the hope of a rebound, could find their patience sorely tested.

At least three parcels of debt have changed hands in the past fortnight at a discount as members of long standing established debt syndicates have offloaded loans at a discount.

HSBC, the Commonwealth Bank and now Westpac all are believed to have sold debt at discounts of up to 20 per cent, clearly abandoning hope of seeing full repayment of their loans any time in the near future.

The buyers, one a Hong Kong based illiquid holdings specialist SC Lowy and the most recent US hedge fund Centrebridge, clearly are eyeing a carve up of the business.

The deals come as two private equity vehicles involved in competing but now aborted equity takeovers are negotiating refinancing options with the struggling group.

As an example of the potentially dire consequences for equity holders in these situations, Nine Entertainment’s owner, private equity group CVC Asia Pacific, last year was forced to relinquish its entire stake, after outlaying close to $6 billion for the group at the height of the market boom in 2007.

Two US hedge funds, Oaktree and Apollo, battled it out with Goldman Sachs to carve up the spoils.

One of the first such manoeuvres on Australian soil was for Alinta Energy, the listed power generating group that once was a key part of the now collapsed Babcock & Brown.

Although profitable and with good assets, the company was awash with debt, and endless refinancing discussions went nowhere.

US private equity group TPG swooped on the debt, hoovering it up at massive discounts before imposing a deal that delivered it all the assets bar one, in exchange for a few cents share.

The Alinta tale bears an eerie familiarity with the plight in which Billabong now finds itself.  But the vultures this time may not be so generous.