Billabong CEO stands by turnaround strategy; At its pre-GFC peak in 2007, Billabong was valued at $3.8 billion. Today it is valued at just $256 million; Billabong, whose founder last year said he wouldn’t sell for $1 billion, slumps to a record low after entering talks on a $287 million takeover.

Billabong CEO stands by turnaround strategy

PUBLISHED: 8 HOURS 8 MINUTES AGO | UPDATE: 1 HOUR 34 MINUTES AGO

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“I do believe the strategy is right,” Billabong CEO Launa Inman says. “The board has endorsed it. What we need to do now is implement this regardless of ownership at this point and time because you have to carry on with the business.” Photo: Louise Kennerley

Billabong International chief executive Launa Inman is resolute that her turnaround strategy is right for the troubled surfwear retailer but has declined to confirm guidance or earnings targets.

Ms Inman would not be drawn on the exclusive negotiations entered into on Tuesday with private equity suitor Sycamore Partners and former Billabong executive Paul Naude over their 60¢-a-share cash offer for the company.She also would not comment on whether a capital raising would be required if the $287 million takeover proposal were to fall over.

“I’m not in a position to comment on that [possible need to raise equity if a bid fails]. But I do believe the strategy is right,” Ms Inman said following a panel discussion at the Bloomberg Australian Economic Summit in Sydney.

“The board has endorsed it. What we need to do now is implement this regardless of ownership at this point and time because you have to carry on with the business.”

Ms Inman said rival Quiksilver’s new strategy was similar to Billabong’s. It is aiming to consolidate the back end of the business and supply chain, offer fewer styles and keep the “DNA of the brands”, confirming that her strategy was right.

Ms Inman said she was focusing on day-to-day decisions and it was business as usual as far as possible. Billabong has been a takeover target for more than a year – since before Ms Inman took over in May – which she has called distracting.

“It is so disruptive having due diligence and …. in the 10 months I’ve been there, there has been five weeks we have not been under due diligence,” she said.

“This is a challenge for any company – how do you push forward with change when there is such uncertainty about ownership.”

Billabong shares slumped 26.7 per cent, or 19.5¢, to a record low of 54.5¢ on Wednesday – representing a 10.8 per cent discount to the 60¢ a share Naude/Sycamore offer – after coming out of a trading suspension.

The takeover is at last 10 days away from being finalised as the suitor’s financier, Jefferies Group, have independent auditor PwC go through Billabong’s books.

Goldman Sachs research analysts said the bid implied an enterprise value of about $490 million, based on a 60¢-a-share cash offer, $55 million in deferred payments and $152 million in net debt.

CBA analyst Jordan Rogers told clients: “The business appears to be in worse shape than low expectations. BBG’s operating performance has been in a free-fall in recent years, and it is far too early to see any of the benefits of the strategy from new MD, Launa Inman.”

Mr Rogers said Billabong was at risk of another capital raising. He said the new offer valued Billabong at 6.2 times forecast 2013 earnings before interest, tax, depreciation and amortisation.

Billabong, which has been hurt by a consumer spending slump in key markets including Australia, and competition from key customers like Pacific Sunwear that introduced their own cheaper brands, last year knocked back two approaches from private equity firm TPG Capital, which offered as much as $3.30 a share.

Under the Sycamore/Naude proposal, Billabong founder, director and major shareholder Gordon Merchant and fellow director Colette Paull will opt for scrip in a new vehicle set up for the takeover. They hold a combined stake of about 16 percent. Other shareholders (up to 8.9 per cent) may also remain invested if they wish, instead of taking the 60¢ cash on offer if a deal proceeds.

Mr Merchant founded Billabong in 1973 on the Gold Coast, Queensland before it became an international organisation. At its pre-GFC peak in 2007, Billabong was valued at $3.8 billion. Today it is valued at just $256 million.

Billabong plunges on cut-price bid

April 10, 2013 – 4:24PM

Billabong shares hit all-time low as investors exit.

Surfwear maker Billabong, whose founder last year said he wouldn’t sell for $1 billion, slumped as much as 30 per cent to a record low after entering talks on a $287 million takeover.

Shares in Billabong plunged by 29 per cent as they resumed trading and closed 19.5 cents, or 26.7 per cent, lower at 53.5 cents.

The share price fall wiped $93.4 million off the company’s market value, taking it down to $256.2 million.

Traders said investors were disappointed that the Sycamore consortium’s revised offer was so heavily discounted. They also noted that the $287 million offer was worth less than the value of inventory on Billabong’s books.

CMC Markets chief market strategist Michael McCarthy said the big fall in the Billabong share price reflected what usually happened when there were well-founded doubts around takeover bids.

‘‘If you count this move from from $1.10 to 60 cents as a further failed bid, that’s now five failed bids here (for Billabong) in 14 months,’’ Mr McCarthy said. ‘‘The market is very concerned.’’

CBA analyst Jordan Rogers said Billabong’s performance had been in freefall in recent years, and it was too early to see any of the benefits of the strategy put in place by chief executive Launa Inman, who was appointed in May 2012.

‘‘Given the competitive position and price points for core Billabong brands, the company’s antiquated inventory management systems, and the risk for further retail store closures, it is difficult for us to have confidence in any Billabong turnaround,’’ Mr Rogers said in a research note.

Billabong, which has been hurt by a consumer spending slump and competition from major retailers that introduced their own surfwear brands, last year rebuffed an approach from TPG Capital that valued it at almost $842 million. It has since shut stores, fired employees, written down the value of its brands and breached the terms on its debt.

‘‘Investors need to take the opportunity to exit the stock,’’ said Nick Berry, an analyst at Nomura. ‘‘There’s no guarantees around the ability to service debt in the longer term and the shares will probably reopen tomorrow at a discount to 60 cents.’’

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.

Mr 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.

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

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.

The Sycamore-led group, which includes former Billabong director Paul Naude, had indicated it may pay as much as $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 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 $287 million proposal from the Sycamore-led group values Billabong at little more than the $225 million it raised selling new stock to shareholders last year. It’s less than the $289 million value put on its inventory of clothes and accessories as on December 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 $3.30 a share in February. Mr Merchant said at the time that he wouldn’t support an offer as high as $4 a share from TPG, according to a regulatory statement. That would have valued the company at about $1.02 billion.

TPG returned with 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 $1.45 bid before walking away in September.

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

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

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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