Offer for Billabong hanging in
The gulf between Friday's closing share price of 48¢ - a record low - and the tentative offer of 60¢ a share by Billabong executive Paul Naude and Sycamore gives an indication of the pessimism in the market after a string of earnings downgrades and failed suitors.
JPMorgan analyst Shaun Cousins indicated the pessimism might be unwarranted.
Mr Naude and Sycamore have already dropped their tentative offer from $1.10 to 60¢ this month and Billabong has indicated that the extended scrutiny, which is due for completion next week, is more to do with bank financing.
"The Sycamore consortium appears to have completed its due diligence, with the exclusivity period appearing more for the debt providers," Mr Cousins said in a report last week.
Billabong has said neither side is obligated to proceed with a deal, but analysts contend that the company has little choice given the potential downside if a bid does not materialise after so many attempts over the past 18 months.
This could include further earnings downgrades and "emphasis by the board about execution and refinancing risks still ahead" if the takeover bid is aborted, according to Citi's Siobhan Lee.
"The company has been backed into a corner and, in our view, the shareholders' best option will be to accept, given the alternative is likely to be even lower," she said.
UBS said the company might need to raise another $100 million from the market if the bid failed. It raised $225 million in the middle of last year at just over $1 a share. UBS said the fact that the 60¢ offer price was put forward by the board suggests the directors had "a low level of confidence" in the turnaround strategy of last August.
The series of takeover offers have been a constant distraction for Billabong's chief executive, Launa Inman, who said this month that the approaches had been "very disruptive" and taken up all but five weeks of her first 10 months as chief executive.
Analysts, including Mr Cousins, have also been wary of the offer from Naude/Sycamore for investors to take shares in the bidding vehicle, Newco, rather than taking cash for their shares.
"The Sycamore consortium structure poses uncertainty for shareholders given the lack of detail on Newco, particularly the level of gearing and the treatment of shareholders (including dividend)," he said.
Frequently Asked Questions about this Article…
The tentative offer put forward by Billabong executive Paul Naude and Sycamore is 60¢ a share, down from an earlier $1.10 proposal. Billabong's shares were trading around 48¢ at the last close, roughly a 20% discount to that 60¢ offer and a record low.
Market pessimism reflects a string of earnings downgrades and multiple failed takeover approaches over the past 18 months. That history has pushed the stock to a record low and left investors wary about the company’s turnaround prospects.
Some analysts, including JPMorgan's Shaun Cousins, suggest the odds are strengthening. Cousins noted the Sycamore consortium appears to have completed due diligence and that the remaining exclusivity period — ending next week — seems focused on debt providers and bank financing rather than further buyer review.
Analysts warn the alternative could be worse: shareholders might face further earnings downgrades and heightened emphasis on execution and refinancing risks. UBS also said Billabong might need to raise another $100 million from the market if a bid fails, after raising $225 million last year at just over $1 a share.
Analysts are wary because the Sycamore consortium’s proposed structure involves Newco, and there is little detail on Newco’s gearing, dividend treatment and overall capital structure. That lack of transparency creates uncertainty for investors who would receive Newco shares rather than cash.
Billabong has said neither side is obligated to proceed with a deal. The company also indicated the extended scrutiny by the bidder is largely related to securing bank financing rather than buyer due diligence.
Billabong’s CEO Launa Inman described the takeover approaches as “very disruptive,” saying they consumed almost all of her first 10 months in the role and limited the time available to focus on running and turning around the business.
Citi analyst Siobhan Lee argued that shareholders may be best advised to accept the offer, saying the company has been backed into a corner and the likely alternative — if no bid materialises — could be an even lower outcome for shareholders.
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