Breakfast Deals: Billabong lifeline

Billabong International finally has a deal on the table, which could deliver Altamont Capital Partners a sizeable chunk of the surfwear company in the end. Etihad Airways has confirmed it’s buying Virgin Australia shares at the right price. Meanwhile, APA Group’s merger ‘premium’ for Envestra has quickly evaporated and ALS Limited has made its move into oil and gas.

Billabong International, Altamont Capital Partners

After 18 months of almost uninterrupted due diligence, Billabong International has a takeover deal in essence only.

New York’s Altamont Capital Partners, in conjunction with US private equity giant Blackstone, has extended a $US294 million ($325 million) bridging debt facility along with another $70 million for the sale of the DaKine adventure sports accessories brand.

Billabong’s $289 million in debt will be immediately paid off in full, while $106 million will be kept as working capital while a longer-term refinancing package is put in place.

In exchange, Altamont gets its choice of chief executive, two board seats, a hefty interest rate and, potentially, 40 per cent of the company.

Firstly, current chief Launa Inman will say goodbye to Billabong after toughing it out for what was undoubtedly the hardest 14 months in the surfwear company’s history.

Inman will be replaced by Scott Olivet, a former chief executive of sunglasses and accessories company Oakley, who was brought in by Altamont on the Billabong play way back in January.

Altamont’s co-founders Jesse Rogers and Keoni Schwartz will become directors of the company. Chairman Ian Pollard said there were no more changes planned for Billabong’s eight-person board.

The New York firm’s bridging loan will be replaced at the end of the 2013 calendar year with a $281 million long-term facility and a $44 million convertible note.

Altamont will collect an eye-popping 12 per cent interest, of which 7 per cent must be paid in cash annually. Should Billabong find itself unable to meet those obligations, the excess interest will be added to the number of shares Altamont will receive if it exercises the note along with options it will be entitled to.

It means that Altamont could receive up to 40.5 per cent of Billabong when all this is over.

In the lead-up to this climax, Billabong’s original lenders bailed. It was reported that Oaktree Capital and Centrebridge snapped up Billabong debt from ANZ Banking Group, Commonwealth Bank, National Australia Bank, Westpac Banking Corporation, Bank of America Merrill Lynch and Societe Generale at between 85 and 90 cents in the dollar.

Given that they’ll be repaid in full, that’s not a bad day’s work for the pair.

Olivet will also purchase 11 million ordinary shares at 23 cents apiece for a total of $2.53 million to signify his commitment to the company.

Under the current scenario, Billabong founder Gordon Merchant, once close to a paper billionaire, will see his stake diluted to as low as 9 per cent, which equates to current value of about $11 million.

Merchant has copped a hammering for letting it be known much earlier in this saga the $3.30 a share indicated by previous suitors would not be enough. It was understood he wouldn’t sell for less than $4 a share.

Needlessly to say, the stance has looked sillier and sillier as negotiations dragged on and on, occasionally interrupted with the odd earnings downgrade.

But as this column has argued, it’s not reasonable to assert that Merchant ‘lost’ a deal at $3.30 a share. Those were indicative proposals and it’s entirely likely that once the suitors took a look at the books they would ‘indicate’ another price entirely.

Now at least, Billabong can say that it has a future of some description guaranteed.

Virgin Australia, Etihad Airways

Etihad Airways chief executive James Hogan isn’t leaving anything to chance, confirming to The Australian that the Middle Eastern carrier has been buying more Virgin Australia shares.

Hogan is quoted in the newspaper expressing Etihad’s intention to buy more shares “at a fair price and the right price”.

Etihad has been purchasing shares in the past two weeks after getting the go-ahead from the Foreign Investment Review Board to increase its stake from 10 per cent to as high as 19.9 per cent.

What is the right price exactly? Sir Richard Branson’s Virgin Group has already offloaded a sizeable stake to another Virgin Australia partner, Singapore Airlines. Air New Zealand, currently at 22.99 per cent, is seeking permission for another 3 percentage points.

Virgin Group is thought to be willing to offload more shares at around 50 cents a pop. Virgin Australia finished yesterday’s session at 45 cents.

“We are in this for the long-term game so there is no rush,” said Hogan.

APA Group, Envestra

APA Group’s proposed merger with Envestra was handily covered yesterday by Business Spectator’s Stephen Bartholomeusz and is further explored in this morning’s edition of The Distillery.

There’s no need double up too much here with Breakfast Deals. But for those wanting some cliffs notes, here are the basics.

It’s a $1.98 billion all-scrip proposal. While APA is selling it as a 10.6 per cent premium to the one-month volume weighed average price, yesterday’s share price movements have levelled the deal to the status of nil-premium.

APA owns 33 per cent of Envestra, with Hong Kong-based Cheung Kong Infrastructure next in line with 17 per cent.

This puts APA in a position where it can significantly thwart any rival takeover proposal short of an all-cash offer, which would be a big stretch.

However, the target’s managing director Ian Little isn’t impressed so far.

“It’s [the offer] conditional and we await the details but on the face of it it’s hard to see where the benefits lie for Envestra shareholders,” Little said, according The Australian Financial Review.

ALS Limited, Reservoir Group

Laboratory testing group ALS Limited has made good on its promise two years ago to expand into the oil and gas sector with a cash-and-scrip $US533 million ($586.5 million) purchase of Scotland’s Reservoir Group from SCF Partners.

The cash component of the offer is estimated at $US386 million, much of which will be funded by a $246 million capital raising.

ALS is issuing new shares via a one-for-11 rights issues at $7.80 a share, which is a 17 per cent discount to the previous trading price.

The rest of the offer will be accounted for with scrip.

Wrapping up

GrainCorp chief executive Alison Watkins denied she’s been offered a job by the company’s suitor Archer Daniels Midland during a tough round of questions from a Senate inquiry in Canberra yesterday.

Royal Bank of Scotland is reportedly looking for a buyer for its Axiom Education Victoria business that maintains and managers 11 schools in the southern state. The business could attract bids above $250 million.

And finally, Qantas Airways has signed a $7 million tourism deal with the Northern Territory government a week after reaching a similar agreement with Queensland for $12 million.