Billabong misses the last wave in

TPG has finally closed the door on Billabong, withdrawing its unconditional proposal just ten weeks after it was first tabled. Still, the private equity fund lasted a respectable amount of time, unlike former suitor Bain Capital, who pulled out after just two weeks.

So whatever Bain saw on the books that got it spooked, TPG has now arrived at the same point.

The problem – apart from the fact that Billabong is suffering from a material issue serious enough to drive away not one but two suitors – is that Billabong refuses to even elaborate on the subject. Its statement today made no mention of why TPG pulled its bid, and that has investors worried.

Billabong shares tanked at the open, dropping 17 per cent to a new record low of 82 cents. To compare, in May 2007, shares in the surfwear giant climbed to a record high of $14.29. That's a huge drop in just a few years.

But the share price is destined to remain at current levels if Billabong doesn't come out to the market with an explanation.

With both TPG and Bain walking away after reviewing the books, it would be difficult to imagine how anyone could invest in the business without knowing what the underlying issues are.

Morningstar analyst Tim Montague-Jones says that the board needs to issue a statement to reduce uncertainty surrounding the business.

"I think the board should be prudent and come out and be responsible and tell investors what the information is so we can come to terms [with it] and work out what the value of the business is," he said.

"It's just that lack of knowledge adds significant uncertainty and risk to the whole fundamentals of the business."

Montague-Jones added that both TPG and Bain Capital must have unveiled material issues with the business, and that the sooner Billabong comes out with something concrete the better.

"I think they have to come out and explain what the issues are so we can work out how material it is and then come up with a valuation and then we can move forward and see if there's value in the business.”

Instead, it looks as if Billabong is resolutely trying to just forget all the chaos created by the TPG and Bain bids. Per the statement issued by the company today, the surfwear company is focused on implementing its transformation strategy and structural organisational change that new chief executive Launa Inman announced in August.

Inman has an unenviable task ahead. Billabong went in a new direction over the past ten years, expanding rapidly by bringing a number of brands under its umbrella. But it failed to adapt its business accordingly, which is why it has such structural problems now. The ill-timed expansion of its retail footprint across the globe has also contributed to the current mess Billabong is in.

Inman is well aware of the structural issues currently hindering the brand. This is where the transformation strategy comes in. Inman tried to steal a march on the typical private equity turnaround approach by slashing costs, closing stores and eliminating unprofitable lines.

If Inman is conducting exactly the kind of clean up that PE firms do, then there is either not enough fat to be trimmed from the company to make it worth Bain's or TPG's while, or there are deeper market issues that the bidders found too daunting.

Inman now has to plough the hard road of simplifying the Billabong business and delivering significant cost savings, all while constantly looking over her shoulder to ensure creditors don't come knocking, or wondering where the next takeover bid might come from.

The problem is that the targets Billabong needs to deliver on are for fiscal 2016. That's a long way off, and at this stage it's unlikely many investors will wait around to see if Billabong delivers.

On top of this, if retail conditions remain at current depressed levels, and consumer confidence doesn't improve, then Billabong will struggle to even meet these targets. It's just another unknown for investors to add to a long list when considering Billabong shares.

For Billabong to have any hope of coming out of this intact, we need to see a statement explaining exactly what the problem is and how it's being addressed, and we need to see it soon. Otherwise, the iconic surfwear brand is headed for a massive wipeout that it will struggle to recover from.