Rewrite for Billabong deal after it falls foul of Takeovers Panel
Altamont and US investor giant Blackstone were chided for three key planks of their capital injection and partial takeover of Billabong and in particular the steep interest rates flowing from the proposal, as high as 35 per cent, and a weighty break fee that served to deter rival takeover bids.
The proposal had the effect of handing nearly 40 per cent of Billabong to its private equity suitors.
In its findings handed down on Wednesday the Takeovers Panel, a peer review body that regulates corporate control transactions and presides over takeover disputes, said a $65 million break fee to be paid by Billabong to its private equity white knight, Altamont, if it walked away from the deal was akin to a "lock-up device".
The panel also found an interest rate of 35 per cent on the proposed $US40 million convertible note for redeemable preference shares and options served to coerce Billabong shareholders to lodge a "yes" vote.
"The magnitude of the 35 per cent interest rate and the circumstances under which it was payable amounted to a 'naked no vote' break fee, which was likely to coerce Billabong shareholders to approve the issue of a controlling interest in the company."
A third requirement that Billabong repay the entire $US294 million loan plus 10 per cent of the principal plus interest in the event of a change in control of the company in the first two years would also deter rival takeover bids.
The panel said it had decided to declare the original Altamont deal unacceptable despite the bridge facility and long-term financing arrangements negotiated at a time when Billabong was drowning in debt and urgently needed funds.
It was brought in to inspect the takeover transaction when rival and losing bidders Centerbridge Partners and Oaktree Capital lodged a complaint in July.
Under a new proposal worked out between Billabong and Altamont, the break fee has been slashed to $6 million and the $44 million convertible note removed. The term loan has been increased from a base of $221 million to $304 million, with an upsize commitment of $39 million.
The 12 per cent to 35 per cent interest rate charge Billabong would have paid on the convertible note has been lowered to 15 per cent. Interest on the upsize commitment is now 10 per cent.
If there is a change of control Billabong will only be required to repay the term loan at a 1 per cent premium.
Billabong said yesterday it expected documentation around the new deal to take two to three weeks.
It will then seek shareholder approval. Altamont said the new deal secured Billabong's future.
Shares in Billabong ended up half a cent to 57¢.
Frequently Asked Questions about this Article…
The Takeovers Panel declared key terms of Altamont's original rescue and recapitalisation proposal for Billabong unacceptable. The panel found certain provisions—most notably a large break fee, a very high interest rate on a proposed convertible note, and a punitive repayment clause on change of control—were coercive and could deter rival bids, so it required the deal to be reworked.
The panel flagged three problem terms: a $65 million break fee payable to Altamont (described as akin to a 'lock‑up device'), a very high interest rate (up to 35%) on the proposed convertible note, and a requirement that Billabong repay the full US$294 million loan plus 10% of principal and interest if there was a change of control in the first two years. The panel said these terms could coerce shareholders and deter rival takeover bids.
Under the revised proposal the break fee was slashed to $6 million and the convertible note (reported at about US$40–44 million) was removed. The term loan was increased from a base of $221 million to $304 million with an upsize commitment of $39 million. The previously high convertible-note interest was lowered (reported as down to 15%) and interest on the upsize commitment is now 10%. If control changes, Billabong would only need to repay the term loan at a 1% premium.
The Takeovers Panel, which regulates corporate control transactions and resolves takeover disputes, was asked to inspect the transaction after rival and losing bidders Centerbridge Partners and Oaktree Capital lodged complaints about the Altamont proposal in July. The panel reviewed the terms and found key elements unacceptable.
The original proposal effectively handed nearly 40% of Billabong to its private equity suitors and included terms the panel said were likely to coerce shareholders to vote 'yes' (for example via the very high interest on the convertible and the large break fee). Those coercive elements were a central reason the panel required changes.
The rewritten deal reduces the punitive borrowing cost that concerned the panel: the previously proposed 12%–35% charge on the convertible-note instrument was lowered (reported as 15%), and the upsize commitment now carries 10% interest. That should make the financing terms less coercive for shareholders compared with the original proposal.
Billabong said it expects documentation for the new deal to take two to three weeks to finalise. After that it will seek shareholder approval of the revised package. Altamont has said the new deal secures Billabong's future.
Shares in Billabong finished up half a cent, closing at 57 cents, after the Takeovers Panel decision and the subsequent reworking of the Altamont proposal.
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