Billabong International

Billabong International’s share price fell 18% yesterday as rumours emerged that private equity suitor TPG was considering withdrawing its conditional $1.45 per share takeover bid (Bain Capital withdrew from the bidding process in September). In response Billabong announced that it was still in negotiations with TPG but admitted that there were some stumbling blocks. With Billabong’s share price now back below $1.10, what should you do?

If you think TPG is foxing to lower its bid, then you could buy now and hope for a quick return when a deal gets done. This speculation, however, makes much more sense for those who are prepared to own the company for the long-term, as the current price largely assumes TPG will walk away.

As we laid out in Sun rises on Billabong wipe out from 09 Jul 12 (Speculative Buy – $1.09), Billabong can pull many levers to improve the business. Chief executive Launa Inman recently announced a plan to invest more in its core brands, which should eventually help arrest the decline in sales. Store closures and other cost savings should also improve margins. That said, turnarounds regularly fail–particularly in the retail industry–they’re inherently difficult and it can take many years to achieve a satisfactory result. Billabong’s share price might also fall further in the short-term if a deal isn’t signed with TPG.

The alternative is to wait and see if the deal falls over or more information is released to make a more informed decision. That might produce a cheaper share price, but you’ll miss out on a quick capital gain if a deal gets done.

Billabong’s business remains riddled with problems but they’re not insurmountable. The current share price also reflects a fairly lousy outcome. Billabong’s share price has fallen 21% since Billabong International: Result 2012 from 28 Aug 12 (Hold – $1.36) and we’re upgrading to SPECULATIVE BUY.