THE DISTILLERY: Billabong abandoned

Jotters outline why Billabong's suitors walked away after due dilligence, and what this means for its share price.

Billabong International starts the week of Monday October 15 with its share price at 83.5 cents a pop because the surfwear company doesn’t have a single suitor on its dance card. Two points have emerged.

First, the company was in such a weakened position that it had to open its books to opportunistic bidders without any questions – the consequences of which are now painfully clear.

Second, the reason why the two private equity suitors TPG Capital and Bain Capital left the company to its own apparently deteriorating devices remains a mystery – that’s not good for the share price.

We start with The Australian’s John Durie, who says there are no miracles expected for Billabong with the departure of TPG.

"If the strength of the Billabong brand was questioned before TPG formally expressed interest in the company in February, eight months of ownership uncertainty have done nothing to help it. That's the inherent danger in company boards allowing potential bidders formal due diligence, yet when they refuse to lift their skirts, boards are attacked even harder. It may seem you are damned if you do and damned if you don't, but it all comes down to corporate performance – and in this case Billabong's track record is poor at best. This puts pressure on the company, and in this economic climate few bidders are very brave.

Fairfax’s Adele Ferguson comes to a similar conclusion to Durie, while comparing the Billabong-TPG showdown to another recent private equity tale that didn’t pan out.

"The lesson here, and in the case of Pacific Brands with KKR, is the boards of both companies felt they had no choice but to let the private equity players in to do due diligence with no strings attached. If they had ignored them, they would have been stung by the wrath of investors, but by letting them in, they have given parties access to the business, which is distracting, only to see them walk away. In the case of TPG it was given an even greater incentive by having two key shareholders Perennial and Colonial agree to sell them their shares. That is now up in smoke. The options expire, with no cost to TPG. While TPG has spent the better part of a year looking at Billabong, off and on, it is still a case of all care and no responsibility and it does throw open the debate on when to allow due diligence.”

Ferguson also spends some words on the unexplained reason why TPG and Bain walked away. The columnist says the "markets hate uncertainty,” but doesn’t flat out call for the company to come clean.

But Business Spectator’s Cliona O’Dowd does with a little help from one of the analysts covering the stock.

"With both TPG and Bain walking away after reviewing the books, it would be difficult to imagine how anyone could invest in the business without knowing what the underlying issues are. Morningstar analyst Tim Montague-Jones says that the board needs to issue a statement to reduce uncertainty surrounding the business. "I think they have to come out and explain what the issues are so we can work out how material it is and then come up with a valuation and then we can move forward and see if there’s value in the business.” Instead, it looks as if Billabong is resolutely trying to just forget all the chaos created by the TPG and Bain bids.”

It’s a good point that O’Dowd picks up on. If Billabong couldn’t sell itself to either the private equity firms at $1.45 a share, despite having previous demanded something north of $4, how can they instil any confidence in the market without coming clean? Two institutional shareholders, Perennial and Colonial, were also pretty keen to bail.

Meanwhile, Fairfax’s Michael West also gets a mention in this morning’s edition of The Distillery for putting the pressure on QBE Insurance after the giant finally admitted that some of its Australian assets had been pledged.

"Pledging means passing control of an asset to somebody else, usually in return for cash. Hence the paranoia on QBE's part. If there were to be a financial catastrophe and QBE's Australian policyholders needed to claim on the group's assets, those assets might belong to somebody else. This is precisely what regulators, reserves and disclosure requirements are for – to make sure the money is there. Yet the Australian Prudential Regulatory Authority has declined to be drawn on the subject.”

In other company related news, The Australian’s Richard Gluyas has some high praise for ear implant maker Cochlear for its management of a product recall announced last year that could easily have been the trigger of a steady and irrevocable decline. Because of the deft touch by management, Cochlear shares are steadily recovering.

The Australian Financial Review’s Sue Mitchell says that Harvey Norman is celebrating its 30th anniversary this month. However Gerry Harvey and his wife Katie Page are facing an era unlike any other they’ve faced over the last three decades.

Fairfax’s Michael Pascoe has a good crack at the latest "the reason we fly” advertising campaign from Qantas Airways. And The Distillery means he absolutely bottles the carrier.

The Australian’s Damon Kitney looks at the departure of John O’Neill as head of the Australian Rugby Union to focus his efforts on Echo Entertainment.

Meanwhile, The Australian Financial Review’s Chanticleer columnist Tony Boyd says NSW Primary Industries Minister Katrina Hodgkinson is examining whether to end the single desk trading system in the rice industry, which is what gives SunRice its power. This is as shareholders push for SunRice to hit the ASX.

In interest rate news, Fairfax’s Ross Gittins talks outlooks this morning. The short version is that if the Australian dollar doesn’t fall, the Reserve Bank will continue to cut. And The Australian’s economics editor David Uren reports that the Reserve Bank is investigating the potential for a housing price breakout, courtesy of low interest rates and a high Australian dollar. Canada and Switzerland are the international test cases. Uren emphasises that the evidence of this happening in Australia anytime soon is virtually non-existent. But the central bank is keeping an eye on it.

Elsewhere, The Australian’s Andrew White argues that the warning from Blackrock’s new country boss, Justin Arter, to the superannuation industry, where many investment managers are struggling to secure returns above the benchmark index in the post-GFC world, is a timely one.

The Australian’s Robin Bromby reports that there are some signs of life in the resources market, with China’s trade figures showing exports rising last month.

And finally, Business Spectator’s Shane White bust out the terribly under-utilised word "yucky” in his description of the Peter Slipper messages in The Last Gasp.

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