MARKETS SPECTATOR: Billabong paddles on, barely

The two interested private equity groups, Sycamore and Altamont Capital, have seen enough of Billabong's business not to want to own it - just yet.

When news hit the ASX in April that former Billabong executive Paul Naude and his buyout pals at New York-based Sycamore Partners had won the right to exclusively negotiate with Billabong’s board to acquire the company at 60 cents a share, few doubted a deal would be done.

UBS analyst Ben Gilbert said there was a 70-80 per cent chance the Sycamore bid would succeed. Perhaps that was a little optimistic particularly after Sycamore asked for and was granted an extension in its exclusive takeover talks with Billabong’s board, a signal that Sycamore was discovering all was not what it had foreseen at Billabong. Perhaps Sycamore should have bid 53-55 cents a share for the company, a price that UBS’ Gilbert says the stock is worth. At 55 cents a share Billabong’s enterprise value is $390 million compared with a $415 million enterprise value at 60 cents a share, says Gilbert.

Now after almost two months of talks Billabong says Sycamore has withdrawn its offer. Not only that but rival buyout firm, California-based Altamont Capital Partners, have also stepped back from seeking control of the company. Sycamore and Altamont did not submit a formal takeover bid to Billabong’s board.

Not surprisingly Billabong’s stock has plummeted. AT 1131 AEST they were down 20 cents, or 44 per cent, to 25.5 cents. Billabong’s shares have fallen 71 per cent since February 22 when it revealed a net loss of $536.6 million in the six months to December 31.

Today in an ASX statement, Billabong said Sycamore and Altamont are in discussions with its board for “alternative refinancing and asset sale transactions, the proceeds of which would be used to repay in full the company’s existing syndicated debt facilities”.

As of December 31 Billabong had net debt of $152.2 million. Gilbert at UBS says Billabong needs to raise $100 million “in the absence of a bid”. The distraction of the latest bid and deteriorating retail conditions is not helping Billabong’s fundamental business. Management is distracted.

Billabong today said its “Australasian trading is below expectations” particularly at its Australian stores. On a comparable store basis, year-to-date sales are 5.4 per cent below the same period a year ago. Gross profit is down 2.3 per cent in the year-to-date from the same period a year ago.

Not surprisingly, in Europe Billabong says its business “remains weak”. An e-commerce start-up has had losses “$4 million larger than anticipated”.

All this has resulted in the company cutting its earnings before interest, taxation, depreciation and amortisation by as much as 21 per cent, to $67 million from a February forecast of as much as $85 million.

Billabong won’t comment whether or how much of a stake, if any, the buyout firms want for injecting cash into a business that is plainly deteriorating before their very eyes. Perhaps the two private equity buyers are keeping discussions going knowing they can pick up the most valuable parts of the business – perhaps the Australian and US operations while scaling back forays into non surfwear items – if they stick around and submit various debt refinancing schemes to Billabong's board while the company gets more desperate as its cash flow deteriorates.

That is a gloomy prospect for those who have not sold out of Billabong stock.

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