Decision day looms for Billabong

The four-year plan or $1.10? Assuming that ex-director Paul Naude knows what he'll find in due diligence, it looks like Billabong's existential moment is fast approaching.

The board of Billabong now appears open to the notion of embracing an offer from a consortium led by the president of its Americas business that it would probably have rejected out of hand only a few months ago.

The board today announced that, having reviewed in detail the "confidential, indicative, non-binding and conditional" proposal from Paul Naude and his backers, Sycamore Partners Management and Bank of America Merrill Lynch, it would grant the consortium access to due diligence.

Conventionally boards and their advisers only give prospective bidders access to due diligence if either the indicative price is clearly in their ballpark of value or they have traded access to get a bump in the level of the proposed offer.

Once a bidder has been granted access the target company has lost a lot of its negotiating leverage, although it does still have a board recommendation to trade for some concession from an aspiring bidder.

Billabong hasn’t extracted anything more from the consortium yet in terms of the prospective offer price, which remains at the $1.10 a share level which Naude originally pitched to the board.

The Naude consortium will be the third private equity-sponsored group to conduct due diligence on Billabong. Both TPG and Bain Capital had a look inside Billabong and walked away, decisions confirmed by the subsequent implosions in Billabong’s earnings.

Last week Billabong, in confirming that the Naude group had made an indicative offer, announced an earnings downgrade. Where previously it had provided guidance of earnings before interest, tax, depreciation and amortisation of between $100 million and $110 million, it said it now expected underlying earnings to be between $85 million and $92 million.

While it isn’t alone – all the surfwear/lifestyle apparel retailers are struggling to cope with the retail recession that has emerged globally – Billabong’s downward earnings spiral, the succession of approaches at tumbling indicative prices and its capital raisings under duress have generated considerable hostility within its shareholder base.

Relatively new chief executive Launa Inman has outlined an alternative to succumbing to an offer at a low point in Billabong’s history – she has articulated a strategic plan that would, if executed well, unlock more than $155 million of incremental earnings – but it is a four-year plan that wouldn’t be completed until 2016.

Given the choice of $1.10 of cash today and holding out in the hope than Inman can actually deliver a restructured and far more profitable Billabong in 2016 there are plenty of shareholders who will opt for certainty even as they recognise the potential opportunity cost of selling out at a low point in the group‘s history and share price.

There is, of course, no certainty that a bid will emerge from the due diligence process but Naude, presiding over an Americas division which is one of Billabong’s core businesses and one which is experiencing problems and, until he stood aside, a director of the group, would have a better grasp of Billabong’s condition and potential than the private equity firms that preceded him into the company’s data room.

Billabong said today that the due diligence process (which is non-exclusive) would take up to six weeks, so its likely fate should be known around the end of January or early February. That will make for a less than relaxing Christmas and New Year season for Inman and her team and an anxious wait for Billabong’s employees and shareholders.

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