Doubt takes the heat off Billabong sale

BILLABONG may insist that TPG is still interested in buying the company but have investors decided otherwise with the embattled company's shares falling yesterday to an even steeper discount to the private equity firm's $1.45 indicative offer.

By InvestSMART · 6 Oct 2012

By InvestSMART ·
6 Oct 2012

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Shares closed 1.5? lower at $1.06 as the market wrestled with the stock's valuation in light of Billabong's statement late on Thursday that TPG had not withdrawn from the sales process but "as part of its due diligence investigations, TPG and its advisers have expressed concerns in relation to some issues".

Shares had already been put into a trading halt following an 18 per cent dive on reports that TPG was considering a withdrawal of its $700 million bid.

"Given the historical issues with this business, there was always the potential for the due diligence process to present problems," said Deutsche Bank analyst Michael Simotas.

"The probability of a deal progressing at this stage is very difficult to assess but TPG has been pursuing the business since February and made agreements with major shareholders, which suggests that it is a keen buyer."

TPG has a 12.6 per cent interest in Billabong after doing deals with its two major shareholders, Colonial First State and Perennial Value, but is not obliged to buy these stocks if it walks away.

Billabong has backed the turnaround strategy being implemented by new chief executive Launa Inman and has said previously that TPG's offer undervalues the business.

The withdrawal of buyer interest is not expected to be good for the share price.

Mr Simotas said: "The potential for the bid to be lowered or withdrawn altogether is real. There would be considerable downside if this occurs in our view, given our fundamental valuation is [about] 85?."

Last month, rival private equity group Bain Capital stepped into the fray, matching TPG's offer, but it dropped out of the bidding after just two weeks of due diligence.

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Frequently Asked Questions about this Article…

Is TPG still interested in buying Billabong?

According to the article, Billabong says TPG has not withdrawn from the sale process. However, TPG and its advisers have flagged concerns arising during due diligence, so while TPG remains linked to the deal it is investigating issues that could affect the outcome.

Why did Billabong shares fall and get put into a trading halt?

Shares plunged after reports that TPG might withdraw its roughly $700 million bid, triggering an 18% dive and a trading halt. The stock later closed around $1.06 as the market weighed the uncertainty around the potential takeover and valuation.

What is the gap between TPG’s indicative offer and analysts’ valuation of Billabong?

TPG’s indicative offer is reported at $1.45 a share, while Deutsche Bank analyst Michael Simotas says his fundamental valuation is about 85 cents a share, highlighting a substantial valuation gap between the private equity offer and that analyst estimate.

How big is TPG’s stake in Billabong and does that force it to complete a takeover?

TPG holds about a 12.6% interest in Billabong after deals with major shareholders Colonial First State and Perennial Value. The article notes TPG is not obliged to buy those shares if it decides to walk away from the wider takeover.

What did Billabong’s management say about TPG’s offer and the company’s strategy?

Billabong has backed the turnaround strategy led by new CEO Launa Inman and has previously said that TPG’s $1.45 indicative offer undervalues the business, signalling management support for the company’s independent recovery plan.

What happened with rival bidder Bain Capital in the Billabong sale process?

Bain Capital had matched TPG’s offer but dropped out of the bidding after just two weeks of due diligence, according to the article, removing a competing private equity buyer from the process.

What are the likely market consequences if TPG lowers or withdraws its bid for Billabong?

The article says a lowered or withdrawn bid would likely be negative for the share price, with Deutsche Bank’s analyst warning of considerable downside if buyer interest evaporates given the uncertainty around the takeover.

What should everyday investors watch next regarding the Billabong sale and share price?

Investors should watch updates on TPG’s due diligence findings, any changes to the indicative $1.45 offer, statements from Billabong management about the turnaround, and potential moves by other bidders—these factors are the key drivers of near-term share price volatility noted in the article.