Billabong’s wave of uncertainty

Investors in the surf-wear retailer were dumped under a wave of heavy selling after bid details finally emerged.

Summary: The 60 cents per share bid for Billabong from Sycamore Partners, led by former US head Paul Naude, was lower than market expectations. But the stock’s 26% price plunge today to 54 cents makes the deal look attractive.
Key take-out: Billabong’s board could hold on for a bigger wave, but they may have to take what’s on offer to head off another capital raising.
Key beneficiaries: General investors. Category: Portfolio management.

Billabong (BBG)

Last week I wrote that Billabong was rumoured to have had two bids in the 80-85c range (See Billabong board balances the bids). Since then it’s clear that the situation has deteriorated even further than people thought, and yesterday the company announced a bid of 60c a share from the Sycamore private equity consortium, led by former US head Paul Naude.

The stock returned to trade today and plunged 26.7%, or 19.5 cents, to 53.5 cents. Billabong has announced a two-week exclusivity period while it considers the proposal, and to allow for the bidders to do an earnings analysis, so it’s still all up in the air and a deal may or not be done. Under the proposal, founder Gordon Merchant would roll his roughly 14% into the deal in scrip, maintaining a stake.

One disturbing thing I have heard, leaving aside the price, is that there’s another hole in the company’s balance sheet.  Having just raised money not long ago, the company might need to raise another $100-$200 million. In that case, the board almost has to accept whatever price is put on the table – or reject a takeover offer at the same time as asking shareholders to put their hands in their pockets.

This is all quite amazing. The overall retail environment has definitely improved, there’s no doubt about that, and yet Billabong has not been a recipient of that improvement. So there seems to be another factor here. David Lorne – who I used to work with – was a former head of Billabong competitor Rip Curl, and is now running yoga-wear retailer Lulu Lemon Athletica. He left surf-wear because he felt that whole ‘look’ was past it. If a talented retail executive like that has left the sector, I think he must have seen this coming, and that the best days of the big 1970s surf-wear labels are behind them.

In any case, Billabong is obviously in a lot worse trouble than people thought. It sounds like the board has pretty much capitulated. That doesn’t mean shareholders have to agree A yes from the board would only be a recommendation, but there’s a clear pattern here of private equity groups looking at Billabong and finding things not to like – and the bid price continues to ratchet down.

Echo Entertainment (EGP)

There’s been a little movement in the Echo share price this week – it closed 1.6% lower today at $3.66 after rising almost 9% in the three days prior – following a proposal to the NSW government to keep its monopoly casino licence there. I think this actually creates uncertainty, and given all the factors this uptick may present a good opportunity to sell.

Echo has offered to put a lot of investment into the existing casino, but in return it wants a second licence for Crown to be refused. While this is moderately good for Echo, it is getting very difficult to predict which way the NSW government will go. On one hand it is a brave government that stands up to James Packer. On the other hand, does Sydney really need two casinos?  My view is that the uncertainty about what might happen now makes Echo an unsuitable candidate. The decision could be made at any time, and if Packer gets a second licence the takeover premium for Echo goes out the window.

Given the spike in the price this week, I would be inclined to take advantage of that and sell.

Sundance (SDL)

Sundance has finally admitted the Hanlong bid is off and – amazingly – the stock has been smashed. I would have thought that anybody who was going to sell would have already sold, but it seems there were some true believers.

That said, when a deal breaks there is often a period of extraordinary weakness because everybody tries to rush the exits and there are no buyers. If there were any other bidders they’d be out by now, and there may be other Chinese companies but the approval from the authorities was never there.

Really, there shouldn’t be anybody still in this. If anyone is – it’s a tough situation. The bid was 57c and now it’s trading at 10c, and while it may not be great to sell I suspect that might be the thing to do. I just can’t see what Sundance can do to develop, and without a partner this stock could go to zero.

Ten Network (TEN)

There has been plenty of takeover speculation around Ten in recent weeks (see my columns on March 6, and February 27), and the share price has been languishing at about 30-35c for six months now.

It just reported a terrible half-year loss of almost $250 million, which includes a lot of one-off write-downs, but it’s also made a big qualitative change to go for a broader audience than the youth market. This is a path Ten’s been down before, and I look at that and see a network flopping around and facing a real shift in youth viewing habits away from free to air.

Even though I do some work with Channel 10, and I know Russell Howcroft who is second in charge there, I have got to say I wouldn’t go near it.

Dell (NASDAQ:DELL)

Finally, it’s a little outside the usual focus but there’s a very interesting situation in the US at computer giant Dell.

Essentially what’s happening is that founder Michael Dell has proposed a deal to take the company private at $13.65 a share, and it hasn’t gone smoothly. Both Blackstone Group and famed activist investor Carl Icahn made preliminary proposals for competing bids at the end of March. A lot of people have thought Dell shouldn’t be able to vote his own shares, and that he’s conflicted, but at the same time the company has gone through some very hard years.

Icahn is a bit like the Robert Holmes a Court of US mergers: he has got a good nose for getting involved. The fact is, Michael Dell wants it – it’s a company with his name, and I reckon Icahn is very smart using his stake and suggesting that he might be a fly in the ointment.

The stock is trading at $US14.19, so if you are of a mind to buy into something overseas, I think this is a situation worth looking at. It’s got some of the classic elements: a founder who really wants to buy the stock and potential competing bidders with a major blocking stake. I think Dell may do some sort of deal with Icahn, and that would likely be good for shareholders. Of course, there’s issues around currency and more, but I think this is one of the more interesting situations globally and if it were an Australian deal I would suggest getting amongst it.


Tom Elliott, a director of Beulah Capital and MM&E Capital, may have interests in any of the stocks mentioned.

Takeover Action April 4-10, 2013

DateTargetASXBidder(%)Notes
13/02/2013Central Australian PhosphateCENRum Jungle Resources0.00
16/03/2103EftelEFTM2Telecommunications Group19.90Pre-bid arrangement
7/03/2013EngencoEGNElphinstone Group64.35
8/04/2013Firestone EnergyFSERange River Gold23.36
22/03/2013Gujarat NRE Coking CoalGNMJindal Steel & Power28.79Closed Mar 29
8/03/2013LinQ Resources FundLRFIMC Resources97.35FIRB approves. 
3/04/2013Neptune MarineNMSMTQ Corp86.81Unconditional. Closed April 5
18/02/2013United OrogenUOGIron Mountain Mining22.93Unconditional
Schemes of Arrangement
24/12/2012Avocet ResourcesAYELion One Metals0.00
11/03/2013EndocoalEOCChina Yima Coal/Daton Group0.00Effective Apr 22
8/03/2013Kumarina ResourcesKMRZeta Resources0.00Vote May 7
22/03/2013Norfolk GroupNFKRCR Tomlinson0.00
8/04/2013Sundance ResourcesSDLHanlong Mining Investment17.99AFR: Terminated.
Foreshadowed Offers
21/03/2013Billabong InternationalBBGAltamount/VF Consortium0.00Indicative proposal
9/04/2013Billabong InternationalBBGExec Paul Naude Consortium0.0010-day exclusivity
4/12/2012GraincorpGNCArcher Daniels Midland19.90Revised indicative offer
5/03/2013Westside CorpWCLUnnamed parties0.00Discussions continue
28/02/2013WHK GroupWHGSFG Australia0.00Non-binding indicative proposal. Discussions continue

Source: NewsBites

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