Playing into a Billabong end-game

Has there ever been a company performing as poorly as Billabong International that has attracted as much private equity interest? Having seen off two private equity approaches, and with a third conducting due diligence, a fourth has now emerged.

The latest prospective suitor, however, looks the most likely to produce an actual offer. While there is a private equity firm involved, San Francisco-based Altamont Capital, it has teamed with an apparel and footwear heavyweight, VF Corporation.

VF's brand portfolio includes power brands like The North Face, Wrangler, Timberland, Vans and Reef, among others. It has a market capitalisation of $US16.4 billion and is a self-described global leader in branded lifestyle apparel and footwear. With a strong presence in Asia Pacific, the rationale for its interest in Billabong is clear.

Its approach to Billabong mirrors those the embattled group has already received, tabling an "indicative, non-binding and conditional" proposal pitched at $1.10 a share – the same level at which the former president of Billabong's North American operations, Paul Naude, and his private equity backers at Sycamore Partners, have indicated they might bid.

The Naude consortium was granted access to due diligence late last month. The VF/Altamont proposal is also conditional on being able to conduct due diligence, which Billabong has said it will grant.
It said it will now run a process to evaluate whether a change of control proposal, at a price and on terms the board would recommend, could be secured.

In other words, Billabong is hopeful that the emergence of the newest suitor might generate some competitive tension and an opportunity to get something other than a distressed sale price for its shareholders.

After its latest downgrade of earnings before interest, tax, depreciation and amortisation between $100 million and $110 million to a range of $85 million to $92 million, it appeared likely that Billabong would fall to the Naude consortium if they actually made an offer after conducting their due diligence. TPG and Bain Capital, of course, walked away after their due diligence investigations last year.

The difficulty for the board and their relatively new chief executive Launa Inman in evaluating offers is that she has just embarked on a radical restructuring of the company and its management. It offers very substantial gains if she can execute it according to the plan, but won't be completed until 2016 and therefore involves considerable time and risk.

The interest from Naude – who as an executive director knows the company intimately – and now from an industry heavyweight, does tend to validate the Billabong view that its brands are salvageable and valuable.

Whether its shareholders are prepared to wait to see whether Inman can restore value or leap at the first offer they can actually accept, assuming one emerges from the two prospects now available, will be a determining factor. But the board itself will have significant influence over the outcome and can try, at least, to trade a recommendation of any offer for something better than $1.10 a share.

The continual approaches Billabong has had to deal with over the past year have been destabilising and may have been a factor in a string of senior executive departures in recent months, although that may also be a function of Inman's determination to impose a very different new strategy and her own desire to replace some members of the leadership that took the company to the brink.

Only last Friday Billabong announced it had appointed a former APN News and media chief financial officer, Peter Myers, as its own chief financial officer, which demonstrates that it can attract senior executives (although it may have to pay danger money and put golden parachutes in place because of the private equity interest).

Given the history of private equity kicking its tyres and walking away Inman and her board have no choice but to manage the company as if it were business-as-usual. They can't, given Billabong's condition and the recessed nature of its key markets globally, put appointments on hold or pause the restructuring in anticipation of an offer that may never be made.

The emergence of the Altamont/VF consortium, however, does tend to suggest that an end-game of sorts is in prospect. It is unlikely there will be a fifth approach if nothing emerges from the existing round of interest.

Either one of the two groups with access to due diligence will actually make an offer which will either be accepted or rejected, or Billabong will finally be left to pursue its restructuring without distraction, at least for a while. Mind you, if no offer does emerge after the two consortiums have had their look at the books, the market will again draw its own conclusions.