Searching for the seed in a barren Billabong

The two Billabong suitors who have spotted potential among the company's rivers of red ink must be hoping today's full-year loss of nearly $900 million marks a turning point.

With the release of Billabong’s June-year results there are two thoughts that come immediately to mind. One is that it is a near-miracle that the group is still afloat and the other is that it is even more remarkable that it is being fought over by two suitors.

It is obvious from the result, a loss of $859.5 million that included $867.2 million of significant items, that Billabong desperately urgently needs to lock up one of those competing offers from the rival Altamont Capital/Blackstone and Centerbridge Partners/Oaktree Capital consortia.

At present the Altamont group is in the box seat, having provided Billabong with immediate liquidity and conditionally agreed a longer term funding and recapitalisation program (Billabong and Altamont weave past a panel hurdle, August 21). Centerbridge and Oaktree, however, last week lodged their own proposal which they argue would be cheaper for the company and offer better value for its shareholders.

Both the prospective new financiers and controlling shareholders obviously see something beneath the tides of red ink that have poured through Billabong’s P&L account and its balance sheet over the past year.

A year ago Billabong still had stated net assets of just over $1 billion. Today they have been reduced to $267 million, which compares with net debt of $207 million (gross debt of $320 million) and deferred consideration liabilities of $58 million.

Excluding the significant items, most of which relate to non-cash impairments of brands and goodwill, Billabong was profitable, albeit barely so. Its after-tax profit before significant items was $7.7 million, albeit well down on the $33.5 million earned the previous year.

What the two consortia circling Billabong probably see is that much of the red ink that has swamped the group in its latest financial year was necessary and has put it on a somewhat better footing.

Indeed the extent of the change which former chief executive Launa Inman was able to achieve during her relatively brief tenure, with the costly distraction of continuous strategic manoeuvring around the company and in the face of serious resistance from the management she inherited, is itself remarkable.

Billabong has closed 158 stores, reduced supplier numbers by 75 per cent, is in the process of cutting its European headcount by 15 per cent, has restricted its Australasian wholesale operations and restructured its US distribution, among other changes to its model.

In some of its regions there are some signs of life and progress even though revenue across the group fell 13.5 per cent (6.8 per cent excluding significant items) to $1.34 billion.

In the Americas, earnings before interest, tax, depreciation and amortisation (EBITDA) were steady, indeed slightly (0.8 per cent) ahead of the previous year at $38 million and in Australasia EBITDA was up 17.4 per cent to $31.9 million.

Europe, not surprisingly given its recessed condition, saw EBITDA (before impairments) fall from $19.4 million to $100,000.

What that would suggest – and the competition for control by the two consortia confirms – is that beneath the apparent wreckage of the group encapsulated in the scale of the impairments there is something of value still left to work with despite the difficult retail conditions in all of the group’s markets, although Billabong itself said there were some tentative signs of improvement in conditions in Australasia and the Americas.

A year ago, when Inman unveiled her strategy, Billabong had far too many unproductive stores, too many suppliers contributing too few sales, an unfocused and unwieldy range of products and brands and an overly complicated business structure.

While it would appear that there is still quite a lot of work to do in completing the restructuring of Billabong, it would appear that it is closer to the end of the process than the beginning.

Now Billabong has to decide on the two recapitalisation proposals in front of it and lock in a new chief executive. The Altamont/Blackstone group has put forward former Oakley chairman and chief executive and senior Nike executive Scott Olivet, who has clearly impressed the Billabong board. Olivet has made it clear that he isn’t available unless the Altamont consortium prevails.

The board would know that it has to be careful if it chooses Altamont over Centerbridge and Oaktree but its chairman, Ian Pollard, may have been preparing the ground for that outcome when he said today the decision would be made not just on financial terms, but on other aspects like management, strategy, alignment with the board, certainty, conditionality and timing.

Given that both proposals involve Billabong’s existing shareholders continuing within the existing listed vehicle it is reasonable for the board to take into account issues other than the simple financials, but the board will also be quite conscious of its potential exposure if it turns down a proposal offering more tangible value.

Whatever the outcome, the result makes it very apparent that Billabong needs to lock up a deal and put its new funding and capital structures and new leadership in place as soon as practicable if the 2012-13 year is to be seen with hindsight as the absolute nadir of its fortunes.