Billabong Update: The Deal is off, or at Least Changing

What We Know 

Billabong announced yesterday that there would not (at least at the present time) be a sale of the entire company to either the Sycamore Consortium (which includes Paul Naude) or to the Altamont/VF group. The company further announced that they were still talking to both groups “…regarding proposals presented to the Company for alternative refinancing and asset sale transactions, the proceeds of which would be used to repay in full the Company’s existing syndicated debt facilities.”
 
Billabong also lowered its guidance again, indicating they now expect EBITDA for the year of $67 to $74 million AUD (Australian Dollars). That’s before any “…share of Nixon NPAT and before Significant and Exceptional Items.” The last guidance the company offered was in February, when they indicated an EBITDA of $74 to $85 million AUD including $4 million AUD from their share of Nixon at the upper end. Ignoring Nixon and taking the midpoint of both ranges then, guidance has been reduced by about 9%.
 
They especially point to poor conditions in Australia and startup losses of $4 million AUD higher than expected for SurfStitch in Europe. Australian wholesale is on plan, but retail declined. Comparable store retail sales are 5.4% below “…the previous corresponding period and gross profit is 2.3% below…” The Americas are noted to be slightly ahead of plan and Europe remains weak, especially for the Billabong brand as was anticipated in February.      
 
You can see the announcement here. It’s under “Recent News” and is called “Company Update.” Trading in the stock started again and by the close of the day (Australian time) it had fallen to $0.23 a share in (AUD) on very high volume of 65 million shares.
 
The other information we have is that there are ongoing layoffs, West 49 is up for sale and, according to Billabong Chairman Ian Pollard, they are “…aggressively reducing costs across all our global operations.” Restructuring and reducing costs, of course, has been part of the plan since Launa Inman became CEO, but it’s starting to feel less like a strategy and more like a financial necessity.
 
The other thing I think we know is that the banks, which have Billabong’s assets as collateral for its loans, wants to get paid off and will “encourage” deals that contribute to that end.
 
What We Don’t Know
 
The first thing we don’t know is why there was no deal. Obviously the reduced guidance had something to do with that. It might be that the required lease payments on all the stores (that don’t show up on the balance sheet) were also a concern.
 
But strategically, if I were a potential buyer, the most important thing to me might be the prospects for the Billabong brand itself. I’d know that if I bought the whole company, I would expect to sell some brands, but I’d have to believe I could maintain and grow the Billabong brand or why make the deal?
 
For its part, the Billabong Board of Directors might not have wanted a formal offer if it was really low. If they thought such an offer reflected only current circumstances and not the fundamental value of the company and its brands, they wouldn’t want to disclose and then reject it. Assuming, of course, that they think they have a choice.
 
That choice pretty clearly doesn’t include selling more stock right now. But, given the conversations we’re told are now going on with Sycamore and Altamont/VF, Billabong’s choices may include selling assets and raising some more expensive debt that lets them pay off their banks.
 
Actually, I guess their choices do, not may, include selling assets; the question is just at what price. Billabong would certainly prefer not to be selling under these circumstances, while Sycamore and Altamont/VF (and other potential buyers that might pop out of the woodwork if certain brands are for sale?) will hope they can get a great deal.
 
Meanwhile, lenders like Sycamore and Altamont/VF might be thinking, “Well, I’m not ready to be all in on this one at any purchase price we can negotiate, but if I lent Billabong some money in the form of convertible debt, it might work out.”
 
The lender would earn a nice interest rate and be in a position to control a chunk of stock when the company recovered. If things went south, they’d be a lender and not a common equity holder protected to some extent by the value of the assets they’d have as collateral.
 
Now this all depends, as it does in any deal, on the cash flow making sense for Billabong based on the asset purchase prices, the interest rate, and the amount lent. We have no idea how that looks. Still, it feels like Billabong and either of these two potential partners might be more likely to have a meeting of the minds in a debt and asset sale scenario than a purchase. I don’t know why I said “feel.” That’s what Billabong told us in their update. Maybe now you understand a little better why.

 

 

15 replies
  1. Jeff
    Jeff says:

    Jeff- kind of random question- why do you think the Sycarmore group thinks having Paul Naude involved is a positive or that he can lead Billabong back? I respect Paul tremendously for what he has done for the surf industry in general but seems to me the entire misguided expansion plan with West 49, paying too much for smaller brands with limited growth potential and a lot of the miscues that led to this were under his watch.

    • jeff
      jeff says:

      Hi Jeff,
      Actually, when Paul first left Billabong to work with Sycamore, I raised exactly that question in something I wrote and said that if I were Sycamore, that’s the first thing I would have asked him. And I concluded he must have had a good answer, though I don’t know what the answer was. You might also consider that those decisions were in different economic times and seemed to make more sense at the time they were made, though I questioned the West49 deal.

      Thanks for the comment.

      J.

  2. Ian madden
    Ian madden says:

    Hi Jeff
    Why does anyone think Billabong can recover? The demand in Europe
    for the big 4 surf brands is declining at an unprecedented, almost unbelievable
    rate. In 20 years we’ve never seen anything like it. Judging by the brand profile at
    zumiez and pacsun (the USA traditionally indicates what will happen in Europe from our
    experience) the future is bleak.
    The Surfstitch partnership was flagged as a potential disaster from the start by almost all UK & European online retailers but gsm ploughed on regardless. Most retailers want it to work out for Bong but its hard to see how this will happen re consumer demand.

    • jeff
      jeff says:

      Hi Ian,
      Depends, I guess, on what you mean by recover. If you mean some deft management with the right vision and product being able to take Billabong back to the days of 15+% a year growth, I doubt it too. If you mean that with the right cost structure, good management and different distribution strategies it might be a profitable if smaller privately held business, I think that could happen. As I’ve been writing recently, it’s hard for a lot companies in our industry to do what I think they should do when they are public.

      Thanks for the comment.

      J.

      • Grant
        Grant says:

        Jeff (s),

        What, if anything is filling the gap that the declining surf brands are leaving? Is the Surf category shrinking generally, or is this a case of new, fresh brands filling in?

        • jeff
          jeff says:

          Hi Grant,
          I’m not completely sure how big a gap there is to fill. You’ve got some new brands that may not specifically be surf, but are youth culture can hope to do just fine in the surf space. I mean, Grant, how big is the actual surf market? Outside of that core market, which is the real surf market and, I think, is pretty small, we’ve got a whole lot of people who are perfectly to get their surf related clothing at Hollister. Pushing it even a little further, how is a checked shirt bought at JC Penney less surf to a non surfing consumer than the one bought at the corner surf shop? Remember, the further you get from the core, the less important the brand is.

          Thanks for the comment.

          J.

  3. Surfer
    Surfer says:

    Jeff- could earn out balloon payments to the old owners of RVCA, Element etc being the grenade that is scarying multiple investors away. I get that required leases could also pose some flexibility challenges but there must be something less flexible that is scaring people away,

    • jeff
      jeff says:

      Hi Surfer,
      I don’t know that those payments would scare anybody away by themselves (my recollection is that much of that is now paid as it’s a while since an acquisition) but it’s certainly something to be considered along with all the other factors.

      Thanks,
      J.

  4. Gregg
    Gregg says:

    Jeff- Based on Quiksilver’s former $.80 price and the only improvement to date has been cutting costs with a current stock price of $7.50 do you think Bong at this price is a good flyer??

    • jeff
      jeff says:

      Hi Gregg,
      Look, there are two things I don’t do. I don’t give stock advice and I don’t own any of the companies I write about. Okay, there are other things I don’t do, and a few I do, but I wouldn’t be comfortable giving a yes/no answer to a question like that and I don’t have the time to write the 10,000 words it would require.

      Hope you understand.

      J.

  5. You Know Who
    You Know Who says:

    The only good that will come out of this now is that there will be jobs created from the spun off brands. Billabong needs to go privet and to do a slow re-build. Europe is a complete mess. They have basically ruined the brand in OZ from what I have been told and the US is anchored down by the inefficient way they conducted the various business silos not to mention West 49th. RVCA and Nixon should be high margin sales, Da Kind ok, and the rest… good luck! Sad to see and may lessons learned. Still to me it’s fascinating that the majority of (surf) retailers out there are still clinging to the two mega brands while they continue to open their own stores, steal web sales and openly sell Costco. Really? The retail community needs to wake up and realize that they actually are the ones who create “cool” but just lazy and forgot how. But that’s a whole other story.

    • jeff
      jeff says:

      You Know Who,

      Strangely, I told Ian a few comments down that Billabong really needed to be private. In fact, I’ve been pushing the idea that once you get out of the very small action sports market and are into youth culture and fashion and competing with a bunch of huge companies for customers that don’t know your story, you need to be private to have a chance. As to why surf retailers are clinging to the two “big” brands, it’s partly inertia. But it’s also, as you and I have discussed, consignments and discounts and terms. Those, unfortunately, do you no good if your customer doesn’t want the product.

      Thanks for the comment,
      J.

  6. Hugie
    Hugie says:

    Jeff,

    I’ve been talking to retailers all over CA, other reps, and some industry bigs. The consensus I’m finding is that the “big 3” or 4, or whatever you want to call it, just don’t care too much any more about the surf retailers that got them to where they are in the first place. The publicly held companies are of course the most guilty, having to please their shareholders and board of directors. Case in point: Billabong puts a store on 41st st. in Santa Cruz 6 or 7 years ago, right smack in the face of all the surf retailers that call that street home. These big 4 always say the same thing to the reps “Don’t worry, it will actually enhance the brands presence in that community, because now the consumer will see the full scope of what we do. Other retailers in the area will actually benefit.” Of course, in reality, it doesn’t pan out that way. The stores in that area dropped Billabong for years, and were super pissed at them for those same years. Bottom line: Billabong probably thought they could do a better job selling their product in that area than their core retailers. So, you sacrifice “the core” to prove a point, or hopefully sell more product, or show people how smart you are, etc. But where is your allegiance or show of faith or support for the stores that got you there? Answer: out the window. Another point that’s been brought up multiple times but deserves more attention is the industry competing with its core retailers by having their own ecommerce sites. Why go to Val Surf or HSS or Hansens and see 15% of the Quiksilver line when I can go to Quik’s site and see the whole shebang? Oh, and I can use the surf shop as a dressing room to try on what I’m interested in and make sure it fits before buying it on line with no sales tax, and usually a discount the surf shop may not be offering.

    I now believe the industry’s biggest failure to date is going into competition with its base of retailers in the two ways mentioned above. A third failure is selling SMU’s (special make-up) product to Costco, under the guise of “Oh, we just sell them what nobody else wanted.” Yeah, well if nobody wanted it, why do tables stacked high with product completely sell through in two weeks? The fact that it always shows up in full size runs would tell any idiot that it’s not the “close outs” that Costco is getting. The industry has not polilced itself, has not shown good faith to it’s core base of retailers, and is slave to shareholders and boards to “show results.”

    I’m not down on the industry, I’m just tired of the big companies always trying to make a case that they care about “the core” when they don’t.

    Cheers, Hugie

    • jeff
      jeff says:

      Hi Hugie,

      Well, where do I go with this except to mostly agree with you? From a strictly financial point of view, the revenue growth that the bigger companies (especially public ones as you say) can expect from core retailers is pretty small as a percent of their total sales. I’ve been pointing out that for years. The bigger the brand, the less financial impact sales to core retailers is so the less important they are financially. Sort of along the same line, the big brands found they had no way to grow except by acquisition or opening retail stores, so they opened stores and tried to convince core retailers it would be a good thing. And I think if it’s a few concept stores, it might be a good thing. But it never seems to stop there. It’s certainly true that a big brand can showcase it’s whole line in one of its own stores in a way (probably a better way) that a core retailer can’t do without becoming a brand store because the core retailer can’t come even close to carrying the whole product line.

      I recognize the issue with the internet too, but don’t know what to say. Each is doing what everybody is doing and the idea that they can somehow not sell on line just doesn’t make competitive sense because consumers expect, regardless of the impact on brick and mortar retailers. I have no idea how the whole internet/brick and mortar thing is going to work out in the end.

      I have a hard time believing that anybody still thinks Costco just gets closeouts. What I hope is that they are getting lower quality products in different designs than what shows up in other retailers. That’s all we can hope for. for

      So I guess I’d say, Hugie, that your points are valid, but we’re kind of stuck with where we are and a better question is what should core retailers do? I’ve been saying now that they had to take chances on smaller, new brands and have systems that allow them to maximize their gross margin and operating income line dollars. And other stuff.

      Thanks for the comment.

      J.

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