The ghost of regret rises above Billabong

Billabong founder Gordon Merchant knew shortly after rejecting an $850 million offer from private equity group TPG earlier this year that he had made a serious error of judgement. Today the magnitude of that error was confirmed.

Merchant and fellow Billabong director Colette Paull effectively blocked TPG's original approach, at $3.30 a share, in February, saying they wouldn't consider anything less than $4 a share. Instead, with Billabong's performance deteriorating dramatically and a threatening $526 million of net debt, Billabong sold a majority interest in one of its best brands, Nixon, in what was akin to a $US285 million capital raising.

That wasn't, however, sufficient to stabilise the group, which has been undermined by an ill-timed and executed rollout of a retail store network and the steep downturn in consumer confidence and spending in Europe and the US in particular.

Its earnings have crashed and it is undertaking a major rationalisation of the retail store network, with 140 stores scheduled to close by June next year. Its new chief executive, former Target chief executive Launa Inman, had planned to completely restructure the group's supply chain and develop a new brand strategy. The collapse in its earnings claimed former long-serving chief executive Derek O'Neill, while chairman Ted Kunkel has also foreshadowed his own departure.

The Nixon sale and the $200 million to $225 million gain on the book value of the interest was supposed to bring stability to the Billabong balance sheet. Instead that gain was more than offset by impairment charges and restructuring costs, forcing Billabong into a deeply discounted six-for-seven rights issue last month to raise $225 million and reduce net debt to around $100 million. The issue was priced at only $1.02 a share.

In the midst of the chaos TPG has returned.

Today Billabong announced that it had received an "indicative, non-binding and conditional" proposal from TPG to acquire the company under a scheme of arrangement. The indicative price of $1.45 a share values Billabong at only $695 million, even though it is in the final stages of raising the $225 million of new capital.

That's why Merchant, who has expressed regret that he wasn't more receptive to the original approach, would now be kicking himself. His opposition to the initial TPG approach has cost him tens of millions of dollars and Billabong shareholders, generally, hundreds of millions.

This time TPG has tried to accommodate Merchant and Paull, offering them the option of rolling all or some of their shareholdings into the vehicle that would own Billabong if the proposal is successful.

It has also lined up some support from Billabong's unhappy institutional shareholders, with Colonial First State and Perennial Value Management agreeing to conditional sale agreements for their 12.5 per cent combined interests in the company.

It is improbable that Billabong's board will be able to simply resist the latest overtures from TPG, given the length and uncertainty associated with the attempt to stabilise and turn around the group, the hostile environment for discretionary retailers and the degree of shareholder disenchantment with the board and management.

With TPG indicating it reserves the right to "refine" its price after due diligence – which could mean either an increase or decrease – the challenge for the Billabong board now will be to convince TPG to inject more value into the proposal or drum up another bidder.

The Nixon sale did demonstrate that there are brands – or at least one brand – within the Billabong portfolio that may be undervalued by the market. Billabong retained 48.5 per cent of Nixon, with the sale price valuing that residual interest alone at about $US225 million, or about 46 cents per Billabong share.

Maybe that's something for Billabong and its advisers to work with as they try to salvage a little more value from the wreckage.