Surf retailer needs a white knight rescue

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 as his wealth has tumbled from $630 million five years ago to less than $40 million today.

While all retail stocks have taking 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 Jeffreys 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, it 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 bunkered 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 TPG's advances. The difference this time around is Merchant won't be in a position of strength to knock an offer back.

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 moral 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 did not have 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 Gordon 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 Gordon'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 CEOs 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 current share price.

The company and Gordon has a lot of soul searching to do between now and a takeover, but one thing is certain: Billabong will never be the same again.