Billabong Rejects TPG’s A$765 Million Bid, Talks Continue

Billabong Rejects TPG’s A$765 Million Offer, Talks Continue
The company is selling assets, cutting jobs and closing as many as 150 stores as it battles stalling consumer demand ahead of looming debt payments. Photographer: Ian Waldie/Bloomberg

Billabong International Ltd., Australia’s largest surfwear company, rejected a A$765 million ($817 million) takeover proposal from buyout firm TPG Capital and said it’s continuing talks to try for a higher offer.

The A$3-a-share cash bid doesn’t reflect the “fundamental value” of Billabong with a change in control, the Gold Coast, Australia-based company said today. Gordon Merchant, the founder and largest shareholder with an almost 15 percent stake, wouldn’t accept that price, Billabong said.

Billabong shares rose above the offer price today, the first time since it announced the TPG bid on Feb. 17. The company, whose stock slumped 78 percent from A$8-a-share in the 12 months before the bid, is selling assets, cutting jobs and closing as many as 150 stores as it battles stalling consumer demand and debt payments loom.

Shareholders “are taking the view that there’s going to be another bid,” Andrew McLennan, an equity analyst at Commonwealth Bank of Australia in Sydney with a “sell” rating on Billabong, said by telephone. “Clearly Gordon Merchant is pivotal. There’s no deal to be done without him.”

Billabong advanced 4.8 percent to A$3.05 at the close of trading in Sydney. The shares have surged 70 percent since TPG’s bid was revealed.

Biggest Solo Bid

The proposed takeover is the largest solo bid announced by Fort Worth, Texas-based TPG since its $1.65 billion buyout of blood test-maker Immucor Inc. last July, according to data compiled by Bloomberg. It is the biggest deal announced in the global apparel industry since VF Corp.’s acquisition of the Timberland Co. last June, the data show.

Any sale may have to be structured such that Merchant retains a stake in Billabong after the takeover, such as through a holding vehicle, McLennan said. Unless that’s achieved, it’s doubtful the company founder will agree to sell even if the price is raised to as much as A$3.50, according to the analyst.

The offer could be increased to A$3.85 a share and still be the cheapest comparable clothing sector takeover since at least 1998, according to data compiled by Bloomberg.

While the talks with TPG continue, it isn’t known whether they will lead to an improved offer, Billabong said.

The company’s earnings have declined as consumer spending stalls in the main markets for Billabong, which generated about 65 percent of revenue from the Americas and Europe in the first half. The profit drop has been compounded as a stronger Australian dollar cuts the value of overseas sales when earnings are repatriated.

Earnings Drop

First-half net income fell 72 percent to A$16.1 million in the six months ended Dec. 31. That was the smallest half-year profit since the surfwear maker first sold shares to the public in 2000. Net debt totaled A$525.6 million.

The Australian dollar has risen 5.6 percent against its U.S. counterpart in the past 12 months, the second-best performer among 10 major currencies tracked by Bloomberg.

The TPG proposal didn’t preclude the planned sale of about half the Nixon watches and accessories business. Billabong plans to sell 51.5 percent of Nixon to buyout firm Trilantic Capital Partners and management to raise $285 million for paying debt.

The Nixon sale “has all but solved Billabong’s near-term debt issues,” Ben Gilbert, an analyst at UBS AG in Sydney, wrote in a Feb. 17 report.