For nearly six months the embattled Billabong surfwear group has been negotiating with two potential bidding groups, both of which have conducted extensive due diligence after originally foreshadowing bids of $1.10 a share. Despite one of the prospective bidders slashing its indicative offer price to 60 cents a share the process has come to nothing.
Billabong announced today that discussions with both the consortia – the Sycamore Partners-funded group led by former Billabong Americas president Paul Naude and the Altmont Capital/VF Corp group – had ended. It is worth noting that while a range of private equity players has wandered through its data room Billabong hasn’t received any offer actually capable of being accepted.
It is now talking to both groups about different sorts of transactions that could involve either capital injections or asset sales or both to raise funds to repay Billabong’s $286 million of debt ($152 million of net debt).
Given that the announcement of the failure of the protracted negotiations coincided with yet another earnings downgrade it isn’t surprising that when the three-week trading halt in Billabong’s shares ended this morning its share price was smashed.
The implosion in the share price probably cuts off any prospect of raising capital other than on distressed terms or from the sale of some of its non-core brands under pressure, which is hardly a good negotiating position.
It is also noteworthy that when Billabong released its half-yearly results in February almost all of its borrowings were classified as ‘’current’’ liabilities, which suggests there is some pressure and urgency to raise cash to get rid of the debt and the covenants associated with it.
The failure of the interminable discussions with the two would-be suitors to produce any offer now leaves Billabong with no option but to pursue chief executive Launa Inman’s four-year turnaround strategy, which involves the slashing of Billabong’s range of products and suppliers and a massive rationalisation of its retail store network.
The execution of that strategy hasn’t been helped by the prolonged distraction and destabilisation created by the unsuccessful bidding process, nor by the retail environment in Australia and Europe.
Today Billabong announced yet another earnings downgrade.
In February Billabong cut its guidance for earnings before interest, tax, depreciation and amortisation from a range of $85-$92 million to a new range of $74-$85 million in constant currency terms, including $4 million of equity accounted earnings from its minority interest in the Nixon brand. Today it reduced that range to between $67-$74 million, excluding any Nixon contribution.
The core problem appears to be in its home market, with Australian year-to-date sales 5.4 per cent below last year’s and gross profit 2.3 per cent lower. After a modestly optimistic start to this year – even Billabong appeared to be starting to head in the right direction – most Australian retailers are now describing a difficult and deteriorating environment.
Europe, not surprisingly, also remains weak. The only mildly positive note was that the Americas business is trading slightly ahead of expectations.
The challenging and volatile retail environment complicates an already quite complex task of trying to stabilise and turn Billabong’s fortunes around, although the end of the bidding process and the removal of the uncertainty over the group’s ownership and direction ought to at least end the destabilisation of management and ultimately allow Inman and her team to focus purely on the turnaround.
First, of course, she needs to stabilise the group’s balance sheet by raising cash by selling assets or equity. Billabong, apart from continuing to talk to Altamont and Sycamore, confirmed today it has put its Canadian retail chain, West 49 on the market.
The retail environment and its own circumstances, however, aren’t going to assist Billabong in getting anything other than fire-sale prices for either its equity or its assets.