Billabong Falls to Record on Offer Below Inventory Value

Billabong International Ltd., the surfwear maker whose founder last year said he wouldn’t sell for A$1 billion, fell to a record low in Sydney trading after entering talks on a A$287 million ($300 million) takeover.

The company fell 27 percent to close at 53.5 Australian cents. That’s 11 percent below the 60 cents non-binding offer that Billabong is discussing with a group including Sycamore Partners Management, and values the retailer at less than the inventory in its stores and warehouses as of Dec. 31.

Billabong, hurt by a consumer spending slump and competition from major retailers, last year rebuffed an approach from TPG Capital worth almost A$842 million. It has shut stores, fired employees, written down its brands and breached terms on its debt. TPG and another bidder later made lower offers and walked away after viewing Billabong’s accounts.

“There’s still a lot of uncertainty around whether the offer will go ahead at 60 cents,” Tony Wilson, a Melbourne-based analyst at Evans & Partners, said by phone today. “I’m not surprised it should be at some discount.”

Under the proposal, Billabong founder Gordon Merchant and former employee Colette Paull must exchange their combined shareholding of about 16 percent for stock in a vehicle being set up for the takeover. Merchant started by cutting board shorts on his kitchen table in 1973 and selling them to Gold Coast surf shops, according to the company’s website.

Billabong Chief Executive Officer Launa Inman declined to comment directly today on Sycamore’s bid or the takeover process.

No Guarantee

Another 8.9 percent of the vehicle is available for shareholders who don’t want to take the 60 Australian cents cash and there’s no guarantee that the transaction will proceed, the company said in yesterday’s statement.

“Investors need to take the opportunity to exit the stock,” Nick Berry, an analyst at Nomura Holdings Inc. in Sydney, said by phone yesterday, after the offer was announced.

The two sides will discuss Sycamore’s offer for 10 business days and shareholders don’t need to take any action yet, the company said in its statement yesterday.

Takeover approaches have been “very disruptive” and have taken up all but five weeks of the 10 months she’s been in the job, Inman said on the sidelines of the Bloomberg Australia Economic Summit today.

Ownership Uncertainty

“How do you push forward change when there’s such uncertainty about ownership?” she said to reporters in Sydney. “I do believe the strategy is right, the board has endorsed that. What we need to continue to do now is implement it, regardless of ownership.”

The Sycamore-led group, which includes former Billabong director Paul Naude, initially indicated it would pay as much as A$1.10 a share when it first approached Billabong last December. In January, Altamont Capital Partners and VF Corp. also said they would consider a bid that high as they sought to conduct due diligence on the company.

Both bidders were examining offers of as little as 50 Australian cents a share, people with knowledge of the matter said April 4. Altamont isn’t being included in the current talks, Billabong said yesterday.

“The business appears to be in worse shape than low expectations,” Jordan Rogers, a Sydney-based analyst at Commonwealth Bank of Australia, wrote in a note to clients yesterday. “Billabong’s operating performance has been in a free-fall in recent years.” It is “far too early to see any of the benefits” of efforts to revamp the company, he said.

Market Value

The A$287 million proposal from the Sycamore-led group values Billabong at little more than the A$225 million it raised selling new stock to shareholders last year. It’s less than the A$289 million value put on its inventory of clothes and accessories as on Dec. 31, according to the company’s most recent balance sheet.

At about 3.7 times the mid-point of analysts’ estimates for earnings before interest, tax, depreciation, and amortization for 12 months ending June, the proposal’s multiple is less than half the median in 57 apparel deals globally over the past five years.

Before the latest bids, TPG made two separate approaches to Billabong last year. TPG offered as much as A$3.30 a share in February. Merchant said at the time that he wouldn’t support an offer as high as A$4 a share from TPG, according to a regulatory statement. That would have valued the company at about A$1.02 billion, according to data compiled by Bloomberg.

Bid History

TPG returned with a A$1.45-a-share provisional offer in July, which it eventually dropped. Another unnamed bidder that people identified as Bain Capital also considered a A$1.45 bid before walking away in September.

At its peak in May 2007, the company was valued at A$3.84 billion.

The company on Feb. 22 reported a record loss in the six months ended Dec. 31 on A$567 million of charges, as it wrote off most of the value of its main brand. It will post 80 percent of its assets and 85 percent of its earnings as security to its lenders after breaching terms on its debt, Billabong said when announcing its half-year results that day.

Before it's here, it's on the Bloomberg Terminal.