Write-down puts Billabong in breach of debt covenant
BILLABONG'S path to redemption got tougher on Friday after the surfwear group downgraded earnings guidance and said a $537 million loss for the half year put it in breach of debt covenants. The breach led its banks to seek a secured charge over most of the business.
The chief executive, Launa Inman, also declined to back her multi-year transformation plan's target - $239 million in earnings before interest, tax, depreciation and amortisation (EBITDA) by 2016.
"I'm not going to comment on that," Ms Inman told analysts on a conference call when asked if the target was still achievable.
The company confirmed that due diligence by its two suitors - which have made $1.10-per-share indicative offers for Billabong valuing it at $527 million - is expected to conclude next month.
One team is led by the Billabong executive Paul Naude and Sycamore Partners, the other by the US retailer VF Corp and the private equity group Altamont.
A $567 million write-down of Billabong's brands, goodwill, and its investment in a joint venture, Nixon, was the main reason for the half-year loss. Underlying group EBITDA was up 13 per cent in constant currency terms at $57 million for the six months to December 31.
This was largely driven by cost cuts and store closures, and the company remains on track to close 160 stores by June this year.
Global sales revenue dropped 8 per cent to a little less than $700 million for the December half.
Ms Inman said the company was seeing positive signs emerging in several markets and was starting to reap the benefits of the transformation strategy.
While the performance of most of the group remained in line with expectations, Billabong said continuing woes in Europe, and the underperformance of its Nixon venture, resulted in full-year EBITDA guidance being reduced to between $74 million and $85 million, down from its previous guidance of $85 million to $92 million.
She also said the Billabong brand itself "has not performed to the expectations we would have liked" for the Australian summer and European winter.
"EBITDA is unravelling faster than the company can control," Sondal Bensan, an analyst at BT Investment Management, told Bloomberg. "[The] chance of a bid at $1.10 diminishes by the day."
Billabong shares closed 5¢ lower on Friday at 86¢.
The company said it was in breach of its debt covenants owing to the $567 million worth of write-downs for the half-year. The situation has since been remedied, but at a price.
Billabong said it had agreed to move "as soon as practicable" to a secured banking arrangement with its financiers "whereby the company will grant security over the majority of its assets".
The new chief financial officer, Peter Myers, said talks with the banks had been "extremely constructive".