THE DISTILLERY: Billabong blunder

Jotters lay into Billabong chairman Ted Kunkel over his capital raising, while one examines the history that led to Rio's Pilbara expansion.

Outgoing Billabong International chairman Ted Kunkel is looking mighty foolish. Having assured shareholders that the surfwear retailer didn’t need more capital after selling a stake in its Nixon business, the company now says it needs capital. Now new chief executive Laura Inman, who’s trying to turn the company around, has to deal with an already stressed shareholder base that will be heavily diluted by this massively discounted non-renounceable rights issue, which favour sub-underwriters. Australia’s business commentators are giving Inman one chance to turn this company around.

The Australian’s John Durie says Billabong shareholders will be wishing they’d seen the back of Kunkel long ago.

"Just last month Kunkel told everyone who would listen there was no need to raise capital – read my lips. He was wrong and shareholders who listened have been made to look silly. June is always a big month for northern hemisphere sales, so one might have thought the chairman could have hedged his bets. The capital raising is a relic of the worst days of the global financial crisis, when investment banks made a fortune, this time Deutsche and Goldman Sachs are picking up $6.5 million in fees on a deal at a 44 per cent discount to market. The 2.9 per cent underwriting fee compares with the 2.5 per cent fee on the recent Echo raising that was completed at a 28 per cent discount to market.”

Business Spectator’s Stephen Bartholomeusz explains where this apparent shift in expectations has come from – it’s the person who now has to deal with the consequences.

"The issue appears to have been prompted by the findings of a review conducted by former Target managing director Launa Inman, initially as a consultant but subsequently as the group’s new chief executive. A combination of Billabong’s own structural issues and the continued deterioration of conditions in its major markets – Australia, the US and Europe – means this year’s financials aren’t going to look pretty. Billabong had expected to report a gain of about $200 million to $225 million on the sale of 51.5 per cent of its Nixon brand to another US private equity firm and its management. Today it said that gain would be more than offset by impairment charges and restructuring costs.”

Fairfax’s Insider columnist Ian McIlwraith similarly explains how radical Billabong’s shift has been, digging deeper than anyone else to find some other signal that shareholders could have spotted this.

"Store closures, changed management and other swinging cuts have not been able to offset awful trading conditions in most of the beach-and-burbs fashion group's markets. To Insider's mind, the final clue about the banks' role in this is that Billabong will repay all of Tranche A of its syndicated facility, drawn to $US143 million, from the issue's proceeds – a full 12 months ahead of the loan's due date. That says the banks want a big slice of cash back now, and shareholders are going to pay for it – with a certainty of no dividends on old or new shares for at least 12 months.”

And The Australian Financial Review’s Chanticleer columnist Tony Boyd, who amongst others questions the structure of the issue, says Billabong shareholders also have to take a leap of faith as Inman won’t be able to hand down her strategy until August.

"Despite all that negativity, one wonders what possessed the board of Billabong to agree to do a share issue at a 44 per cent discount to the previous close and a 30 per cent discount to the theoretical ex-rights price and not give all shareholders an opportunity to get some proceeds. A renounceable issue would have allowed those shareholders who did not take up their entitlement to the six-for-seven rights issue to sell their entitlements. Under a renounceable issue any entitlements not taken up are auctioned. Sub-underwriters do not like renounceable issues because they cannot be assured they will get the stock at the issue price. They like non-renounceable issues, especially heavily discounted ones, because they can be assured of picking up unwanted stock.”

In other company news, Fairfax’s Malcolm Maiden says Rio Tinto’s $US3.7 billion ($3.6 billion) expansion of its Pilbara iron ore business can be traced back over a decade to its decision to outbid Anglo American for North Ltd. It’s a decision that Rio copped a lot for back when it was made, but the move continues to pay dividends for the company and the country.

Fairfax’s Michael Pascoe argues that the perception that Europe is China’s largest trading partner and shrinking – something contained in the Reserve Bank’s last statement – is slightly misleading. Don’t get him wrong, Europe is in trouble, but if you were to isolate emerging economies, they by far out-trade Europe and are not shrinking.

Meanwhile, The Australian Financial Review’s Matthew Stevens forewarns of a looming battle between mining tycoon Clive Palmer and gas guru Richard Cottee.

Elsewhere, The Australian’s Bryan Frith suspects he has discovered another hidden motivation behind the timing of Consolidated Media Holdings’ announcement that News Limited has put a proposal in.

In economic news, The Australian’s Glenda Korporaal writes on the deteriorating hopes of a US economic recovery. The Australian’s economics correspondent Adam Creighton is about as scathing of the G20 summit in Mexico as it’s imaginable to be.

And finally, also writing in The Australian, Giles Parkinson explains precisely why basically nothing is going to happen on July 1 when the carbon tax comes into effect.

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