Not even two competing bids for Billabong International Ltd. are enough to convince traders the Australian surfwear maker will be able to seal a deal.
The retailer has opened its books to two groups of suitors with preliminary offers of A$527 million ($544 million). Two other buyers abandoned higher proposals last year, and traders are doubtful either A$1.10-a-share bid will be consummated. Billabong closed yesterday 12 percent below the latest offers, the third-widest gap among similar-sized deals in developed Asia-Pacific nations, according to data compiled by Bloomberg.
“After all the failed attempts and the lack of confidence in management, there’s no confidence in the due diligence process,” Stan Shamu, market strategist at IG Markets Ltd. in Melbourne, said in a phone interview. “The discount is pricing in the potential for the due diligence process to reveal some cobwebs. A lot of investors aren’t willing to take that risk.”
While the bids rank as the cheapest versus sales among apparel deals since 2007, Commonwealth Bank of Australia says the two groups -- one featuring Altamont Capital Partners and VF Corp., and the other including director Paul Naude and Sycamore Partners -- may pull their offers after evaluating Billabong. There’s also a risk that Billabong’s largest shareholder, founder Gordon Merchant, won’t sell, after he shunned a sweeter proposal last year, Elevation LLC said.
Billabong today fell 2.1 percent, the most in almost three weeks, to 94.5 cents in Sydney. The decline cut the company’s market value to A$453 million.
Chris Fogarty, a spokesman for Gold Coast, Australia-based Billabong, declined to comment on the prospects for a takeover or the plans of Merchant, who is also a Billabong director. Michael Freitag, a spokesman for Sycamore in New York, said the firm and its bidding group had no comment.
Altamont also had no comment, Aman Battish, a representative for the Palo Alto, California-based private-equity firm, said in an e-mail. VF is pursuing Billabong as part of its expansion of brands affiliated with sports and outdoor activities, Chief Executive Officer Eric Wiseman said last week.
“When you look at the surf space and think about iconic brands in the space, Billabong has to hit your radar,” Wiseman said in phone interview Feb. 15. He declined to elaborate on the due diligence VF has carried out on Billabong.
Formed in 1973 when Merchant started making surf shorts on Australia’s east coast, Billabong’s market value reached A$3.84 billion in May 2007, while its sales reached a peak of A$1.7 billion in the year ending June 2009, data compiled by Bloomberg show. The fortunes reversed as big clothing store chains introduced new surfwear brands and consumer spending slumped during the world’s debt crisis.
Early in 2012, Billabong said it would close as many as 150 of its 677 stores worldwide, cut jobs and sell control of accessory-maker Nixon, considered at the time to be its most lucrative unit. Meanwhile, sales are expected by analysts to fall to A$1.3 billion this year, the lowest since 2007 and down 8 percent from a year earlier.
Billabong, whose biggest market is the U.S., last year reported its first annual loss since a 2000 initial public offering. The company has cut its profit forecasts at least 10 times since the year ended June 2008, according to JPMorgan Chase & Co. On Dec. 19, Billabong reduced earnings estimates for the year ending June 30 by as much as 49 percent. Chief Financial Officer Craig White left the next day.
“The earnings have been so poor, and trending worse, that it’s hard to justify a price much higher than what has been proposed,” John Maysles, an event-driven senior analyst at Elevation in Los Angeles, said by e-mail. Investors are concerned about “any buyer’s willingness to make a higher offer, if any offer at all, after combing through the data.”
The two A$527 million bids, excluding Billabong’s debt, represent a 63 percent discount to the company’s sales through last June. That’s a lower revenue multiple than any purchase of an apparel manufacturer worth more than $100 million since the September 2007 takeover of Kellwood Co. by Sun Capital Partners Inc., according to data compiled by Bloomberg.
Even as the list of suitors interested in Billabong grows, investors are reluctant to bet on a deal because Australia’s stock market has offered more certain profits in recent weeks, said Peter Esho, chief market analyst in Sydney at City Index Ltd., a London-based provider of trading services in bonds, stocks and commodities.
“When the market’s going up, nobody wants to be caught with another loser, another possible takeover which didn’t occur from a serial offender,” he said in a phone interview. “There are probably easier places in the market to make money.”
Australia’s benchmark S&P/ASX 200 index has risen 16 percent in the past six months compared with a 2.5 percent gain in the previous half year. The Standard and Poor’s 500 index, by comparison, is up 7.2 percent in the past six months.
Billabong ended trading yesterday at 96.5 Australian cents, or 12 percent blow the A$1.10-a-share bids. Only Perth-based iron ore miner Sundance Resources Ltd. and Brisbane-based coal-seam gas explorer Westside Corp. are trading further below their pending takeover offers, among deals worth more than $100 million in the developed Asia-Pacific region, data compiled by Bloomberg show.
Another potential barrier to a deal is Billabong’s founder Merchant, said Maysles at Elevation. Merchant owns more than 14 percent of the company, data compiled by Bloomberg show.
TPG Capital, the Texas-based buyout firm owned by David Bonderman, pitched four different offers to Billabong last year, ranging from A$3.30 for each share down to A$1.45. After Merchant’s lawyers said in February last year he wouldn’t sell for less than A$4 a share, TPG’s lowest bid five months later included an offer to Merchant to ringfence his own stake.
TPG walked away in October without giving any reasons.
An unnamed bidder, which people familiar with the matter identified as Bain Capital LLC, dropped an offer in September after carrying out due diligence.
“What are investors supposed to think?” said Shamu at IG Markets. “Is there something preventing all these bids from going through? No one really knows what’s in these books. There’s definitely a lot of skepticism.”
Not everyone’s dismissing Billabong. TIAA-CREF, owner of the fourth-largest U.S. life and health insurer, holds a 6.2 percent stake after buying shares between October and February. The group’s TIAA-CREF Investment Management unit and Teachers Advisors Inc. acquired shares for between 84 cents and A$1.05 each, below the latest takeover bids, a Feb. 6 filing shows.
VF, the largest U.S. clothing company and owner of The North Face, Wrangler and Reef labels, is mainly interested in the Billabong brand for its actions sports business. Naude, a former professional surfer in the 1970s, is bidding with Sycamore Partners, a New York-based private equity firm that focuses on retail investments.
Naude, who leads Billabong’s U.S. business, was granted access to Billabong’s books on Dec. 24, and VF and Altamont followed on Jan. 14. Altamont says it prefers complicated targets that are falling short of their potential, even if they soak up time and resources.
Billabong said Jan. 14 it may take six weeks to determine whether it can reach an acceptable agreement with either suitor.
“Both groups bidding for Billabong, and in particular the VF Corp. group, stand a good chance to turn Billabong around,” Albert Saporta, head of research at Makor Capital Ltd. and a Geneva-based managing director of AIM&R, an alternative investment research firm and hedge fund group, said by e-mail. AIM&R and Makor have a research joint venture, he said. He expects an agreement at A$1.10 a share or higher.
Still, investors haven’t forgotten the collapse last year of proposals from TPG and Bain, said Jordan Rogers, an analyst in Sydney at Commonwealth Bank. If due diligence fails to yield a bid, Billabong will face pressure to raise cash by selling stock, probably for less than 70 cents each, he said.
“The issues at Billabong are significant,” Rogers said in a phone interview. “There is a risk that after you do due diligence, you decide you’re not even going to try.”