THE DISTILLERY: Billabong's bitter pill

Just when you thought things couldn't get worse for Billabong International, a lowball offer from one of the company's directors has coincided with a profit downgrade. Australia's business commentators believe the timing of these two events is not totally coincidental, but also that the position of Billabong has been seriously weakened.

The Australian Financial Review's Chanticleer columnist, Michael Smith, (Tony Boyd is on leave) writes that the latest profit downgrade from Billabong just confirms the suspicions of some of the troubled surfwear company's shareholders; that being, if Billabong is to survive it needs to become a private company.

"It is hard to shake the feeling Paul Naude, the head of Billabong's Americas operations who is spearheading the latest attempt to take the company private, is holding all the aces. His timing has been impeccable. While Naude, who stood down as a director four weeks ago, would not have had access to weekly sales figures since mid-November, he probably had an inkling there was some more bad news to come before the year was out. The dilemma for Billabong chairman Ian Pollard has been weighing up the merits of Naude's $1.10 offer while assessing the damage from the latest weekly sales figures."

Fairfax's Stephen Bartholomeusz also notes the sweetness of Naude's timing and the relative lack of sweetness in his offer.

"Results in South America were weaker than forecast and there had been significant cancellations of orders in Europe, particularly southern Europe, and lower than forecast retail sales and gross margins in the region. Naude presumably was aware of that deterioration, particularly in the businesses he led, in the lead-up to his decision to stand down as a director and executive while he explored the potential for a leveraged buy-out of the group. Naude has led Billabong's North American business since 1998. He may not, however, have appreciated the precise impact of the downturns in the Americas and Europe on Billabong's numbers."

Fairfax's Elizabeth Knight notes that Billabong could be forced to issue yet more bad news to its shareholders, a fact that will weigh on their mind as the board considers Naude's proposal.

"After all the significant (loss) items that will occur this year, the revised profit forecast is almost 50 per cent lower. And there was a clear indication that the board will need to look at the book value of assets, which means the losses could be far larger. (In Billabong's books the net assets are about $1 billion. The market values the same assets at less than half this amount.) Billabong was busy defending its disclosure credentials on Wednesday, saying it only last week became aware of deteriorating profits. If this is true its position is even more worrisome because it suggests there is little visibility about future performance - its grip on the business is loosening.”

Similarly, Fairfax's Malcolm Maiden tries to get into the minds of the shareholders by running through the questions they must be asking.

"The first is what should be done to renovate Billabong's global business and restore its profitability and market value. The second is how much extra value a renovation can create – the potential reward – and a third is how much execution risk any owner of Billabong is taking on with a complicated and lengthy recovery plan. The final question that hangs off the first three is whether a takeover pitched at $1.10 balances risk and reward between buyer and seller, enabling a recommended takeover to occur. The price that works will discount the value a renovation could create for execution risk, give some of what is left to existing shareholders and pay them a premium for control, and leave enough potential upside on the table to reward the buyer who takes over the renovation project.”

In other company news, The Australian Financial Review's Jamie Freed argues that it was entirely appropriate for Whitehaven Coal to reject a proposal from China's Shenhua Group to throw its Watermark coal project into the ASX-listed miner in exchange for an equity stake. "Whitehaven already has better development projects on its plate such as Maules Creek and Vickery,” writes Freed.

Also in resources, The Australian's Robin Bromby says it "may” be time to stop trying to make sense of movement in the gold price. That point was reached a long time ago. Investors are more likely to discover Moby Dick swimming in the fountain of youth than make sense of the gold price.

Meanwhile, Fairfax's Michael Pascoe remains displeased with the ease with which billionaire James Packer has secured the support of the NSW O'Farrell government for his Barangaroo casino without a public tender.

Elsewhere, The Australian's Richard Gluyas takes a look at the Australian banking industry circa 2007. It's a very different picture, particularly when it comes to tier one capital ratios.

And finally, The Australian's economics editor, David Uren, says the utterances from the incoming Japanese governing party about the role of its own central bank is just the latest example of how the model has been eroded by the GFC.