THE DISTILLERY: Billabong brush-up

Scribes consider how Billabong International will formulate a restructure, with some disagreeing as to whether a debt-to-equity swap is in the pipeline.

Embattled surfwear company Billabong International was almost universally expected to miss out on a takeover offer from its two bidding groups, and so it has. But there is a bit of disagreement between some business commentators about whether the private equity firms will push for a debt-to-equity swap now that we’re talking capital restructures instead of takeovers.

Fairfax’s Elizabeth Knight starts things off with news that the bidders are hanging around to see if they can come to a capital restructure agreement with Billabong.

“Whether the loans would ultimately convert to a controlling equity stake in the business has not been addressed. The talks are believed to involve the provision of debt at double-digit interest rates or a combination of debt and warrants that would be convertible into shares. It would also hinge on the company agreeing to asset sales beyond the divestment of Canadian-based West 49, which has already been announced.”

On the issue of a debt-for-equity deal down the track, The Australian’s Bryan Frith thinks it’s a likely outcome.

“It's thought that Paul Naude is still involved in the Sycamore Partners proposal and that, while VF Corporation would not be involved in financing of the Altamont Capital Partners proposal, it may still be a buyer of some of the assets. It's suggested that any refinancing would be covenant lite and would not involve the issue of additional equity. However, private equity groups aren't bankers. When they take on debt it's usually in distressed situations and they do so with a debt-equity swap in mind. If Billabong manages to secure a refinancing from Sycamore or Altamont it would presumably involve an element of convertibility.”

On the other hand, The Australian’s Blair Speedy appears to completely disagree.

“The refinancing is not expected to include any mechanism for converting the debt into equity, so even looking five years ahead, the buyout funds are unwilling to gamble that Billabong will have done anything more than make enough to pay off their debt, or at least refinance it. Of course, none of this would have happened if Billabong had simply accepted an offer from another US private equity fund in February last year.”

The Distillery can’t swallow that last suggestion. Yes, for some it’s irresistible to laugh at Billabong for knocking back private equity indicative proposals at $3.30 a share when it can’t flog itself now for 60 cents. It’s hilarious.

But they were indicative proposals, not firm bids. If Billabong had given the private equity bidders access to the books, they would have seen a deteriorating picture and, as we’ve seen since, those $3-plus proposals would only have become bids at much lower levels.

That’s if they became bids at all.

But that’s all in the past now. The Herald Sun’s Terry McCrann urges Billabong’s management to get back to the business of running the company.

“Yes, times are tough in retail. Yes, times are tougher at self-indulgent vanity retailers from a vanished pre-GFC time, like Billabong. And they've still got a lot of coming back to earth to do. But this is still a business that generates well over $1 billion of annual revenue. This is still a business that's heading for a gross (EBITDA) profit of around $70 million in this it's most dumped-upon year.”

The Australian Financial Review’s Chanticleer columnist Michael Smith explains how Billabong chief executive Launa Inman will love nothing more than to get back to doing what she’s been trying to do since her appointment.

“Inman is fed up with the infighting and cultural wars at Billabong, which has seen her clash with some managers at the company horrified at the prospect of an outsider dismantling the formerly iconic retailer. She told staff in a memo that the company now had to proceed with its turnaround plan ‘without hesitation’ but warned the changes would be painful.”

And Business Spectator’s Stephen Bartholomeusz argues that the bidding process will naturally bring about a sense of stability to the company and allow management to focus on Inman’s turnaround plan.

“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.”

In economics news, the Reserve Bank of Australia kept interest rates on hold yesterday, as expected. Fairfax’s Tim Colebatch said the bank's governor Glenn Stevens had fewer words to say about the rate outlook yesterday than ever, because “in part…the Reserve, too, is more than unusually unsure what lies ahead”.

The Australian Financial Review’s Jennifer Hewett hits a similar note in her piece on the rates decision, describing the practice as not much more sophisticated “than sticking a finger in the wind and hoping it’s blowing the right way”.

The Australian Financial Review’s economics editor Alan Mitchell looks at the diverging opinions of Professor Ross Garnaut and Treasury over the outlook for the terms of trade. If Garnaut’s right and the terms contract to more historical levels, we could be in for a spot of bother.

Meanwhile, The Australian’s John Durie previews the decision by the Australian Competition and Consumer Commission on the proposal by Heinz to acquire rival baby-food company Rafferty’s Garden.