THE DISTILLERY: Fortescue smoke signals

Jotters pore over Fortescue's options for the future, while one paints a dismal picture of the declining surfwear industry.

Fortescue Metals Group will announce to the market today that, well, something is happening. No one really expects much concrete detail to emerge with the miner facing a myriad of possible solutions to its debt worries. One commentator says there’s a good chance founder Andrew Forrest will put the company into an extending trading halt to address the problem thoroughly, while another suggests that the billionaire might be thanking Federal Reserve Chairman Ben Bernanke right about now.

Also in this morning’s edition of The Distillery, two business writers give us their perspectives on the Rip Curl privatisation. It’s the end of an era for the iconic Australian surfwear industry, but Rip Curl has some distinct advantages over embattled rival Billabong.

Firstly, The Australian’s Paul Garvey says there’s a good chance that Fortescue will halt its shares for a while longer.

"While the market will want firm details, the reality is Fortescue is unlikely to have anything definitive to share with investors today. The sale of fringe assets – which is certainly Fortescue's preferred option – will take some time to pull together. It is only five days since reports about Fortescue's shaky debt covenants position surfaced, an insufficient period to pull together a deal of the scale Fortescue needs. Whether or not Fortescue says anything about it in its official release today, investors will expect Forrest and his team to be devoting significant energies to achieving an asset sale. This is where an indefinite trading halt could come in handy.”

The Herald Sun’s Terry McCrann makes a clever point about the timing of Fortescue’s trading halt that was somewhat fortuitous.

"Forrest and Fortescue started talking to the banks about potentially waiving the covenants after the iron ore price plunged to less than $US90 a tonne, before the US Fed announced its QE3 move early Friday morning our time. While the Fed had been widely expected to announce some form of quantitative easing – it can't just do the conventional thing and cut its official interest rate as that's already at zero – Bernanke over-delivered…Whether or not this works in generating a real and sustained lift in the US economy, remains to be seen. But it had an immediate – upward – impact on global commodity prices.”

Meanwhile, The Australian’s Fred Pawle says there are three reasons our beloved surfwear industry’s wave of success that began in the 1960s has come to an end. The first is that Rip Curl and Billabong are now competing with Nike, Red Bull and Target for athlete sponsorships.

"Those last three brands are, in fact, sponsoring last year's women's world champion Carissa Moore, who has no surfwear label endorsement. Given that pro surfing is the traditional surf industry's primary marketing strategy, this is a fundamental threat. Significantly, these large, multinational interlopers have mostly declined to pick up licences for pro-tour events, despite several being available. (Nike sponsors one event on the pro women's tour.) So the traditional surf industry bankrolls the tour that promotes the athletes sponsored by their much bigger rivals. That's not a recipe for success.”

The Distillery urges everyone to read this one; it’s such a full but concise picture. But if you need the quick version, Pawle’s other two reasons are; the surf tour has become such a joke that 11-time world champion Kelly Slater has called for a rebel tour that actually surfs waves rather than bumpy water; labels with no connection to the surf industry have established their own brands.

Smart Company’s James Thomson was surprised that the company’s founders Doug Warbrick and Brian Singer are selling out now, but runs through the aspects that will be emphasised in order to secure a good sale price.

"What Warbrick and Singer will need to do is to try and use the Billabong sale to their advantage by presenting their business as a much cleaner and stronger option for anyone looking to get into the surfwear business. This will be done by pointing out a few key differences, including; The fact that Rip Curl has one brand as opposed to Billabong, which has a number. While this does give Billabong a few more growth options, Rip Curl can argue it as a much more focused business; Rip Curl has a much smaller company-owned retail footprint than Billabong (Rip Curl has less than 200, Billabong has more than 600); Rip Curl’s ownership structure could make a takeover easier. Singer and Warbrick own 72 per cent; Francois Payot, a director and founder of Rip Curl Europe, owns 16 per cent; chairman (and Australia Post CEO) Ahmed Fahour owns 2 per cent; and the rest is held by other management. Billabong has a range of institutional investors, founder Gordon Merchant with 15.6 per cent and plenty of mums and dads.”

In other company news, The Australian Financial Review’s Chanticleer columnist Tony Boyd writes that you won’t hear the "multi-brand strategy” coming from Westpac Banking Corp management anymore as the lender shifts its focus to wealth management.

Fairfax’s Adele Ferguson says the profit warning from Macmahon Holdings is indicative of the next phase in Australia’s cooling mining boom. When the miners start mothballing projects, it’s only a matter of time before mining services companies start to feel the pinch.

The Australian’s Richard Gluyas says that if the stalemate between CVC Asia Pacific-Goldman Sachs and the US hedge funds holding a large chunk of Nine Entertainment’s debt continues for another four weeks, the network will be put into receivership. Meanwhile, his colleague John Durie reports that Alesco Corporation will use what is expected to be a large protest vote against DuluxGroup.

Fairfax’s Eric Johnston brings us statistics from the latest Australian Council of Superannuation Investors remuneration report, which indicates that CEO bonuses are at their lowest levels since 2004.

Fairfax’s Peter Hartcher urges readers to realise that China’s leadership remains uncertain about the country’s outlook, which contrasts strongly with the confidence of billionaires Kerry Stokes and James Packer, who both call for stronger ties.


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