Markets: Billabong's Californian escape

California's Altamont Capital has struck an effective ownership deal with struggling Billabong that does its best to protect its tail.

Altamont Capital Partners, Billabong’s new financier and effective owner, is named after California’s Altamont Pass, a route used by some during the California gold rush. Altamont was also the site of the fatal stabbing at a Rolling Stones concert of Meredith Hunter by a member of the Hell’s Angels motorcycle gang who were acting as security guards.

Altamont co-founders Jesse Rogers and Keoni Schwartz have tried to ensure their investment in Billabong will not turn into a nightmare. They have sought to protect their downside while maximising their potential upside through a mix of loans and securities that carry annual payments and options that may cement Altamont’s control over the clothing retailer that started out as a surf wear company in 1973 but has morphed into a general clothing retailer that has lost its way.

Altamont founders Rogers and Schwartz will sit on the Billabong board. They have enticed the former chairman and chief executive of Oakley, Scott Olivet, to come to Australia to turnaround the beleaguered company. Altamont’s public relations firm said Rogers and Schwartz are not making any comment at this time.

Billabong shareholders, who have seen the value of their stock plunge 96 per cent since January 1 2011, will be the biggest losers in the Altamont deal. Their equity stake in the company may drop as low as 59.51 per cent after nine and a half years, according to an ASX statement. Altamont’s future stake may be as high as 40.49 per cent. It is unclear what will be the future stake or role of Billabong’s cofounders Colette Paull and Gordon Merchant. They, together with their families, had a 16 per cent stake in the company as of April 9.

A Billabong spokesman declined to comment.

Billabong’s board perhaps had no other option but to accept the Altamont deal. The company was faced with a deadline to refinance a loan of about $400 million. GE Capital has agreed to provide a multicurrency credit facility of up to $177 million. Altamont is also playing the role of a Billabong lender.

Altamont will initially get as much as a 15 per cent stake in Billabong for lending the company $325 million at an annual interest rate of 12 per cent. This money will be lent to Billabong from July 22 until December 31. The share price options that Altamont gets for lending this money to Billabong have a strike price of 50 cents that can be exercised for a period of up to seven years. That indicates the private equity firm believes Olivet can turn Billabong into a something trim, taut and terrific.

Altamont is perhaps making Olivet’s life a little easier or spotting an opportunity with a neglected Billabong brand by agreeing to buy ski, surf, skate and snowboard apparel seller Dakine for $70 million.

Moreover Altamont, by providing credit to Billabong, has got the company to sign an exclusive financing agreement with it and its financing partners – the New York private equity giant the Blackstone Group. If Billabong tires of the financing arrangements with Altamont and Blackstone’s GSO Capital Partners and manages to persuade another company to be its financier on or prior to January 15 next year, Altamont is entitled to a payment of $65 million, or 20 per cent of the value of the $325 million loan. If Billabong falls under the control of someone other than Altamont before January 15 and the loan is repaid by December 31 then Altamont is also entitled to a $65 million payment from Billabong.

Altamont’s control over Billabong is further enhanced after the end of 2013. It will lend as much as $281 million to Billabong to repay the $325 million loan. The interest on the $281 million loan is between 10 and 12 per cent per annum, payable quarterly in cash and payment in kind. The loan has a covenant in respect to leverage; Altamont has not divulged details of the covenant, but that will be tested on December 31, 2014.

Billabong will also issue $44 million worth of securities that will pay an annual interest rate of 12 per cent payable in cash and payment in kind to Altamont. These securities will give the private equity firm the right to own Billabong stock through redeemable preference shares. A portion of the shares issued to Altamont will pay an interest rate as high as 35 per cent per annum. The private equity firm can convert its option for Billabong stock at 23.5 cents, that will represent as much as 25 per cent of the company’s equity. A dividend of 12 per cent per annum in cash and Billabong stock may be paid to Altamont.

Billabong’s shares fell half a cent to 25 cents yesterday. Billabong chairman Ian Pollard admits any turnaround will not be “an overnight story,” according to Bloomberg News. The same may be true for the stock.