Sharks circle as Merchant in deep water

IT SEEMS the only solution for Billabong is a white knight trade buyer that can rescue it from the bourse and re-energise its iconic surfwear and streetwear business outside the public gaze.

IT SEEMS the only solution for Billabong is a white knight trade buyer that can rescue it from the bourse and re-energise its iconic surfwear and streetwear business outside the public gaze.

The company, which traded at $17 five years ago, slumped below $1 yesterday as it returned to the ASX after a shock $225 million capital raising.

For its founder, major shareholder and director, Gordon Merchant, it has been a wild ride and his wealth has tumbled from $630 million five years ago to less than $40 million today.

While all retail stocks have taken a pounding in the past two years, Billabong's fall from grace has been worse than most. It is a glaring example of a company whose credibility is so badly damaged and staff morale so low that it seems the best solution is a new owner who can spend the time and expertise to rebuild it.

The situation hasn't been helped by Merchant's absence. Not only didn't he take up his full allocation in the capital raising, despite rejecting a private equity offer at $3.30 back in February, he didn't face his investors to explain why not. Instead, he is believed to be taking time out at his beach house in Jefferys Bay, South Africa.

The falling share price comes as at least two industry players and some private equity operators are believed to be considering taking a strategic holding or making a full takeover bid for Billabong.

Speculation is rife that within the next two to four weeks private equity and a trade buyer will emerge. Names being touted include TPG, KKR and Archer, but the list could be far greater given this company still has some strong brands and has just lost its way.

Trade buyers with an interest are believed to include Nike and French luxury group PPR, which bought Volcom Inc, the Costa Mesa surf-and-skate brand, last year for $US607.5 million. A wealthy family company is also believed to be hunkered down looking closely at retail companies, including Billabong.

It isn't the first time private equity has considered a tilt at Billabong. TPG made an offer at $3.30 a share in February but Merchant used his stake to block the advances. The difference this time around is Merchant won't be in a position of strength to knock back an offer.

This follows a shock announcement by the company last week that it would have to raise $225 million in fresh equity at $1.02 a share. The falling share price, including a profit downgrade, has enraged investors to the point where a few are contemplating a class action against the company.

Troubles at Billabong can be attributed to an ill-judged strategy, a series of profit downgrades, liquidity and debt fears, a dysfunctional board and now a capital raising.

Not surprisingly, staff morale is dangerously low. It wasn't helped when the board decided to appoint a new chief executive, Launa Inman, last month. At the time of her appointment there was scepticism in the investment community that she had the right skill set to fix the company's mess. An increasing number of staff are now questioning her appointment as she comes to grips with the different brands, including ascribing the right name to the right brand.

Sources close to the company said Merchant has gone away to his beach home for three weeks to digest the realisation that a deal is inevitable. He is believed to have not been present at last week's board meeting for the capital raising decision. His absence, along with a string of other factors, has left staff gutted.

One source said Merchant's wealth was tied up in Billabong and despite the decimation of his wealth, he was reluctant to sell out. It is believed that if a private equity operator or trade buyer offered him a role and a stake in any takeover, he would back it. It comes as a number of shareholders, including Billabong's second-largest shareholder, Perennial Value, has suggested he resign from the board.

The key topic among staff is who will pounce first, private equity or a trade buyer. The overwhelming attitude is that a private equity owner would enable some existing staff to jockey for positions, while a strategic partner or trade buyer would install their own team. For Inman, who has been in the job a month, depending on what transpires, she could end up being one of the shortest reigning chief executives in listed company history.

Investors are not surprised chairman Ted Kunkel will step down between now and the next annual meeting given he signed off on the acquisition of hundreds of retail stores that are now being closed, as well as the sale of a 51.5 per cent stake in one of the company's best assets, accessories brand Nixon.

However, when put into context of what has gone on in the past six months it is no surprise. For starters, it has removed a chief executive, had a profit downgrade, issued an equity raising and knocked back a private equity offer at what was more than triple the present share price.

The company and Merchant have a lot of soul searching to do between now and a takeover but one thing is certain - Billabong will never be the same again.

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