Why Billabong's founder should go

Gordon Merchant's decision to block a private equity takeover for Billabong has proved disastrous, and his explanation for the move shows he's no longer fit to act as a director for the group.

Smart Company

The trouble with company founders is that they love their businesses too much.

And so it has proved with Gordon Merchant, the founder and largest shareholder of surfwear giant Billabong, who back in February scoffed at a $3.30-a-share takeover of Billabong and said he wouldn’t even sell for $4 a share.

Yesterday, the company’s share price halved after the stock was released from a trading halt following last week’s $225 million capital raising and profit downgrade.

The shares now sit at 96 cents. Still don’t think you would take $4 a share, eh Gordon?

Merchant, who sits on the Billabong board, has admitted his mistake in an interview with The Australian Financial Review.

"I feel bad about the whole situation,” he said from South Africa, where he is holidaying.

"I thought it was the right decision at the time... No one has lost more money than I have.”

Incredibly, Merchant admitted he made his decision as a "shareholder, not as a director”. This will be cold comfort to Billabong’s minority shareholders, who would have had an expectation that Merchant would be looking out for them and not just himself.

But no. Merchant didn’t just scoff at the offer from private equity firm TPG – he actually stopped the board from talking to TPG.

"[We] do not support Billabong taking any steps to assist or facilitate a proposal by TPG Capital, including allowing TPG Capital to commence due diligence on Billabong, even if the price TPG Capital offered was $4.00 per share,” Merchant said back in February.

Merchant, like so many Billabong shareholders, can well remember the heady days of 2010, when Billabong shares were trading as high as $12 and you can understand why selling out at $3 or $3.30 or even $4 would be particularly galling.

But, as I wrote a few months ago, the world is a very different place than it was just two years ago and the retail sector is almost unrecognisable.

Here’s what I said then:

"Merchant might not want to sell cheaply, but Billabong’s independent directors need to seriously assess what the company is really worth in the current environment… Merchant, as company founder, is clearly a voice the Billabong board is listening to – a point reinforced by the release of his letter to the board.

"But should the board really not take "any steps to assist or facilitate a proposal by TPG Capital” as Merchant says?

"I don’t think so. The talks should continue unless the board is very, very confident it can quickly restore Billabong to its former glory.”

This current board won’t be turning Billabong around – chairman Ted Kunkel and fellow director Allan McDonald will depart after the next AGM.

Gordon Merchant should go too – especially after his admission that he looked at the TPG as a shareholder rather than a director.

Late last week, John Murray, managing director at Billabong's second-largest shareholder, Perennial Value, called for Merchant "to remove himself from the board" after blocking the TPG bid, saying Merchant has a huge conflict of interest.

"Dismissing any possible bid below $4 reflects poor judgment for someone who should know more about this business than anyone else.”

Murray also makes the crucial point that Merchant’s mere presence on the board could be preventing any potential buyers of Billabong from coming forward with a deal.

Those potential buyers would have seen how TPG’s offer was dispatched and could have no confidence they are going to get a fair hearing.

"Gordon Merchant departing the board removes any conflict of interest issues for the board and would give us confidence that the board could entertain any potential bids through due and proper process," Murray told The Australian.

What’s happened at Billabong is sad. There’s no other word for it. This is a great brand and a formerly good company that has simply failed to read the market and react quickly enough to it.

The decision to buy hundreds of retail stores when everyone was running away from retail looked good in theory – owning the whole chain allows you to control margins – but has been disastrously timed.

The company’s best hope now looks to be to get new chief executive Launa Inman to streamline the business as best as possible and pretty it up for a sale.

Unfortunately, getting anything like the $3.30-a-share that TPG was offering will be next to impossible.

Gordon Merchant says he’d now be willing to accept a price under $4. He should do – to use his words – as a shareholder and not as a member of the Billabong board.

This article first appeared on SmartCompany on June 26. Republished with permission.