Billabong no longer drowning but not yet waving

Gordon Merchant once was known as the richest man in surfing.

With an estimated wealth of $800 million just four years ago, when Billabong shares were pushing through $18, his stake in the company he founded on his kitchen table in 1973 was worth just $11 million this morning.

Billabong shares spiked about 44% to 36 cents after the market opened on the news that private equity group Altamont Capital Partners had thrown the company a short-term financial lifeline.

But the $325 million bridging loan comes at a price. The interest has been struck at a hefty 12%. And Altamont will take control, ending up with as much as 40% of the equity in a deal that will heavily dilute the interest of existing shareholders.

Altamont’s two founders will take board seats at Billabong and have replaced Billabong chief executive Launa Inman – who was appointed just 13 months ago to turn the company around – with former Oakley chairman and chief executive Scott Olivet.

The US group will assume an initial 15% stake with the opportunity to lift that through a series of options and securities issues. Altamont has cemented its dominant position with a series of break fees, at around $65 million, should Billabong be taken over or refinance elsewhere.

Altamont has also snared a key asset, DaKine, in exchange for $70 million, an amount that will provide the beleaguered group with some much needed cash.

But the pain is far from over for Billabong. It has $400 million of debt that must be repaid this time next year and now must contemplate the unpalatable prospect of selling key assets at firesale prices.

Its Canadian retailer, West 49, purchased at a huge premium just as consumer sentiment soured and as online retailing was gathering pace, has been mooted as the first cab off the sales rank. But it is just one of many.

With close to 20 acquisitions between 2001 and 2010, including its huge shift into retail, most of those operations were acquired on earnings multiples that will never support the debt.

It is the retail expansion that has left Billabong almost mortally wounded. In 2008, Billabong had 230 retail stores worldwide. Within three years, that had swelled to 639, during a period when retail sales across the developed world were collapsing and margins were under pressure.