Billabong Loses Half of Market Value as Takeover Talks End

Billabong International Ltd. (BBG), the 40-year-old Australian surfwear company that has breached debt-payment terms, lost about half of its stock market value after takeover talks with two suitors ended.

Sycamore Partners Management and Altamont Capital Partners, which had been in separate talks to buy Billabong, are now in refinancing and asset-sale discussions with the Gold Coast, Australia-based retailer, it said in a statement today.

Billabong, whose market value reached A$3.84 billion ($3.74 billion) in May 2007, fell 49 percent in Sydney trading. After raising capital, selling assets and rejecting at least two takeover bids in less than two years, the retailer today cut its earnings forecast again and said it may sell Canadian retail chain West 49 to repay debt.

“Raising capital is going to be difficult,” Nick Berry, an analyst at Nomura Holdings Inc., said by phone from Sydney. “The fact that they are flagging asset sales shows the difficulty they are under.”

Billabong fell to as low as 19 cents and traded down 49 percent at 23 cents at the close, cutting its capitalization to A$110.2 million. Exclusive talks over a 60 cents-a-share offer from a group including Sycamore and Paul Naude, the company’s Americas director, ended May 8. The company had entered separate takeover discussions with Altamont in January.

Photographer: Carla Gottgens/Bloomberg

Flip-flops are displayed for sale at the Billabong International Ltd. store in Torquay, Australia. Close

Flip-flops are displayed for sale at the Billabong International Ltd. store in Torquay, Australia.

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Photographer: Carla Gottgens/Bloomberg

Flip-flops are displayed for sale at the Billabong International Ltd. store in Torquay, Australia.

Michael Freitag, a New-York-based spokesman for Sycamore who works for Joele Frank, Wilkinson Brimmer Katcher, couldn’t be reached by phone for comment after office hours. Aman Battish, an external spokesman for Altamont in the U.S. at Brunswick Group, didn’t immediately return a call and email seeking comment.

Board Shorts

Billabong was founded by Gordon Merchant in 1973 when he started cutting board shorts in his kitchen and selling them to Gold Coast surf shops, according to the company’s website. As the sport gained popularity, Billabong’s sales and earnings soared. Its fortunes turned as major stores introduced their own surf brands and the financial crisis cut consumer spending.

Billabong and Merchant, still the largest shareholder, rebuffed a takeover approach from TPG Capital worth almost A$842 million last year. TPG and another bidder later made lower offers but walked away after viewing Billabong’s accounts.

There’s no guarantee the refinancing talks will succeed and the company said it will “aggressively” cut costs across the group while the discussions continue.

“The refinancing is intended to provide the company with a comprehensive solution and an appropriate capital structure,” said Billabong Chairman Ian Pollard. “It’s our intention to conclude these discussions as soon as practically possible.”

Debt Terms

Billabong said in February the company will post 80 percent of its assets and 85 percent of its earnings as security to its lenders after writedowns put it in breach of terms on its debt.

A strong Australian dollar that cuts the value of overseas sales and slowing consumer spending at home have combined to depress Billabong revenue. The company has shut stores, fired employees, and breached terms on its debt as local sales and a weak European economy weighed on earnings.

“It was a great company that didn’t realize how fast it had to diversify,” Evan Lucas, a markets strategist at IG Markets Ltd., a provider of trading services in Melbourne, said by phone. “They are going to really have to shed off assets irrespective of the price they are going to get.”

‘Limb from Limb’

If Billabong’s “debt shifts well ahead of asset value, it might not have the chance to reinvent itself,” Lucas said in an e-mailed statement. “In this situation, the banks will have no hesitation in ripping Billabong limb from limb as the banks collect on its debt.”

The string of takeover approaches have been “very disruptive,” Billabong Chief Executive Officer Launa Inman said April 10. Even before today, the company had cut profit forecasts at least 10 times since the year ended June 2008, according to JPMorgan Chase & Co.

Billabong’s market capitalization today is less than half the value of the goods left on the company’s shelves. The retailer valued its inventory of clothes and accessories at A$289 million on Dec. 31, according to the company’s most recent balance sheet.

Competition

Earnings before interest, taxes, depreciation and amortization for the 12 months ending June 30 will now range from A$67 million to A$74 million after Australian trading missed expectations and Europe remained “weak,” the company said today. That compared with a previous forecast of A$74 million to A$81 million.

As at the end of December 2012, net debt was A$152.2 million, down A$8.7 million from June 2012, the company said in its half year results filed Feb. 22.

In the U.S., Billabong is facing competition from Abercrombie & Fitch Co. (ANF)’s Hollister. Abercrombie opened the first Hollister store in Ohio in 2000, as a “West Coast oriented lifestyle brand targeted at high school age guys and girls,” according to a company press release.

Hollister’s rise over the past decade shows that the authenticity touted by traditional surf-wear labels isn’t valued as much by their customers, Phil Jarratt, author of Salts and Suits, a history of the local surfwear industry, said in a phone interview last October.

Abercrombie’s most recent annual sales of $4.51 billion are more than three times the A$1.29 billion Billabong recorded during 2012.

To contact the reporter on this story: Angus Whitley in Sydney at awhitley1@bloomberg.net

To contact the editors responsible for this story: Anjali Cordeiro at acordeiro2@bloomberg.net; Stephanie Wong at swong139@bloomberg.net; Sarah Rabil at srabil@bloomberg.net

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