Billabong finally catches a break

Auctions with only one bidder tend to produce disappointment for the vendor. Add just one more prospective buyer, however, and the game changes dramatically. The emergence of a second tyre-kicker for Billabong proffers that potential.

Until yesterday, the troubled surf, ski and skate wear group had only the one prospective suitor, the private equity firm TPG, which had been granted due diligence on the basis of an indicative, non-binding and conditional proposal pitched tentatively at $1.45 a share. There was no guarantee that TPG would actually offer that amount.

Billabong's only mechanism for creating any kind of pressure on TPG to put something more on the table if it opted to proceed was the restructuring strategy presented by new chief executive Launa Inman late last month, which pointed to a potential lift in earnings before interest, tax, depreciation and amortisation of more than $155 million by 2016.

Whether that strategy presentation was aimed at TPG or Billabong shareholders it was Billabong's only hope of creating some leverage for an increase, even if token, in the ultimate offer price. Or at least it was the only hope until today.

Today Billabong said, after the close of ASX trading yesterday, it had received an "indicative, non-binding and conditional" proposal from another party. The description of the approach is a dead give-away that the approach was from another private equity firm, which the market immediately identified as Bain Capital.

The new suitor has also proposed a price of "around" $1.45 a share. That was good enough for Billabong to grant it, too, access to due diligence while repeating that its board doesn't believe $1.45 a share reflects the group's fundamental value in a change of control transaction.

Unless either or both of the parties come out of the due diligence horrified by what they've seen Billabong now has a realistic prospect of playing them off against each other to get a better price, although sometimes, of course, private equity competitors decide to co-operate rather than compete.

Whatever the eventual outcome, it is certainly an improvement in Billabong's position. It still has the option of trying to convince its shareholders that there is sufficient latent value within the group if Inman is given a chance to execute her plan that would show offers around the $1.45 a share level, which value the group at about $695 million, are clearly inadequate.

It is also worth noting that private equity executes acquisitions via schemes of arrangement because their lenders demand certainty of outcomes. A scheme can't be prosecuted without the board's support, so there is an additional element of leverage the Billabong board can exploit should one or both of the suitors want to proceed.

That it has now attracted two potential suitors tends to suggest that, where the market had come to regard the group as almost a basket case, experienced and hard-nosed international investors see potential value to be recovered. That adds some credibility to the board's view that the indicative offers are inadequate. Competition is a marvellous thing.