Billabong still struggles under wave after wave

The board of ailing surfwear company Billabong needs to ask only one central question - is the management able to revive the company's financial fortunes or should the directors do all they can to encourage a proposed offer of $1.10 a share organised by one of its own directors?

There is no doubt that Billabong faces enormous challenges and that a couple of its large institutional shareholders do not share the board's faith in the newly installed chief executive, Launa Inman.

These shareholders were supportive of previous attempts by private equity firms to bid for the company. Clearly they want out, even though they will take a substantial loss on their holdings.

The various overtures of interest received earlier this year - a couple from private equity firm TPG and one from Bain - were either rejected by the company or abandoned by the suitors after they had undertaken due diligence.

Unlike most corporate bids, the revised offers or new offers have come in lower rather than higher.

In Billabong's case this is not all that surprising. Its announcements to the stock exchange have been littered with profit downgrades, debt problems, assets sales and an equity issue.

Only a few months ago TPG walked away having looked under Billabong's bonnet - and it saw something that neither it nor the company elaborated on.

On Wednesday some of the fog around this situation lifted when the retailer announced yet another profit downgrade. It now expects this year's trading result to come in about 16 per cent below what it told the market only a few months ago.

After all the significant (loss) items that will occur this year, the revised profit forecast is almost 50 per cent lower. And there was a clear indication that the board will need to look at the book value of assets, which means the losses could be far larger.

(In Billabong's books the net assets are about $1 billion. The market values the same assets at less than half this amount.)

Billabong was busy defending its disclosure credentials on Wednesday, saying it only last week became aware of deteriorating profits.

If this is true its position is even more worrisome because it suggests there is little visibility about future performance - its grip on the business is loosening.

Meanwhile, none of this should have come as much of a surprise to the new bidder, a private equity consortium led by Billabong's executive director and head of its US business, Paul Naude.

He knows there is more fundamentally wrong with the company than can be fixed with fresh spark plugs and a spray of paint.

His offer made over the weekend was conditional on, among other things, no material adverse change in Billabong.

The profit downgrade would have breached that condition but he will push on regardless.

In reality, he now has no choice. He was part of and loyal to the old Billabong guard and may have had a questionable future, which could have been threatened by Inman's broom.

Having moved outside the tent there was never any coming back for Naude.

But the board now needs to decide whether Naude's offer is sufficiently generous to allow him and his team of financiers access to the real numbers - or due diligence as it is referred to in the corporate trade.

In essence, a private equity vehicle will try to pull this company apart and put it back together again by cutting costs and selling businesses.

Many of the strategies Naude will employ are the same ones that Inman is looking at, but none have received much traction to date. If he and his team is are offering $1.10 a share it is probably worth more to him.

History has clearly shown where previous Billabong managements have made mistakes. The simplest explanation is that they overspent on brand acquisitions, whose costs ballooned but whose revenues didn't - a classic pincer crunch.

Billabong also invested in the retail supply chain by buying its own stores and ladling on corporate debt in the process.

The deteriorating retail conditions across the globe cemented the problem.

The Billabong brand still has strong levels of awareness and relevance but only in a couple of areas of the apparel market, such as board shorts.

The brand is anchored through sponsorships around surfing and skiing, which allows it some cachet, but teenage girls are not swayed by this marketing when it comes to buying T-shirts. In other words, it is a mass market brand that is focusing on niche markets.

The brand has not been successfully amortised across a broader range of apparel where there is loads of competition.

A few years ago it would have been considered laughable that anyone would bid $1.10 for Billabong. In January last year the shares were trading about $6.90. The share price graph over that period shows it has fallen off several cliffs.

Presumably Naude believes he can stage some kind of revival if he can gets his hands on the management and away from the glare of the listed marketplace.