Billabong International

Billabong International has finally—it took two days too long in our view—officially announced what was spilt to the press on 17 Dec 12. Paul Naude, sidelined director and head of the Americas business, in conjunction with Sycamore Partners Management and Bank of America Merrill Lynch is preparing a $1.10 per share bid for the company.

Whether a bid proceeds from here is unknown. Our investment case, though, rests on a turnaround of the business not a buyout, so the outcome of this bid doesn’t bother us too much. Still, at $1.10 per share Naude would be getting Billabong at a cheap price.

Of more concern was the 2013 earnings downgrade that joined today’s announcement. Earnings before interest, tax, depreciation and amortisation are now expected to be between $85m-$92m, excluding around $29m of non-reoccurring charges, down from a previous forecast of $100m-$110m. The company sighted continuing difficulties with its Canadian retail business, West 49, weaker than expected results in Brazil, cancellation of orders from struggling European businesses, and poorer sales from Billabong’s Nixon joint venture. All up it’s not great news, but turnarounds are rarely smooth sailing. Management has a clear plan (see Billabong's road to recovery from 25 Oct 12 (Speculative Buy – $0.855)), it just needs time to execute it. At this very early stage we’re willing to be patient.

The share price is back around where it was pre-bid and Billabong remains a SPECULATIVE BUY.

Note: The Growth portfolio owns shares in Billabong International.