Billabong Receives an Offer to be Taken Private

Well, it appears I’ve done it again.  After having published just this morning an article in which I said, “Billabong would be better off as a private company, but I don’t see a path to privatization that makes sense to Oaktree,” Billabong has received an offer to have its outstanding shares acquired for $1.00 each (Australian dollars) from Boardriders (formerly Quiksilver), in which Oaktree has a majority interest.  Guess I should have added, “to which Billabong could be expected to agree.”  I may still turn out to be right with that caveat.  Here’s the announcement.

INDICATIVE AND NON-BINDING PROPOSAL RECEIVED FROM

BOARDRIDERS, INC.

GOLD COAST, 1 December 2017: Billabong International Limited (Billabong) (ASX: BBG) confirms that it has received a confidential, indicative and non-binding proposal from Boardriders, Inc. (Boardriders) to acquire all of the shares in Billabong, other than those already owned by Boardriders’ related entities, at a price of $1.00 cash per share, via a scheme of arrangement (the Indicative Proposal). Funds managed by Oaktree Capital Management, L.P.(Oaktree) have a majority interest in Boardriders. Oaktree, through controlled entities, already holds 19% of the shares in Billabong and is one of Billabong’s two senior lenders.

The Indicative Proposal is subject to a number of conditions, including due diligence to Boardriders’ satisfaction; securing committed financing; unanimous recommendation from the Billabong Board; and entry into a definitive scheme implementation agreement between the parties. Any scheme implementation agreement would also be subject to a number of further conditions, including shareholder and court approvals, and all required regulatory approvals and clearances. After consideration by the Board and the Company’s advisers of the Indicative Proposal, the Board decided to grant due diligence access to Boardriders to enable Boardriders to put a formal proposal to Billabong. That process is likely to take a number of weeks.

The Billabong Board notes that there is no certainty this process or the Indicative Proposal will result in an offer for Billabong. Billabong shareholders do not need to take any action in response to the Indicative Proposal at this time.

The Company will update shareholders, in accordance with the Company’s continuous disclosure obligations, in due course.

Billabong has appointed Goldman Sachs as its financial advisor and Allens as its legal advisor.

Billabong’s stock closed yesterday in Australia at $0.78 a share.  I imagine it will rise when the markets open in Australia.  I wonder how shareholders will feel about that price.  If this deal is recommended by the Billabong Board of Directors, it would indicate to me that perhaps Billabong isn’t seeing the improvement it expected. As you read above, Oaktree already controls 19% of Billabong’s shares and is one of the two lenders on the debt that matures in under two years.  They’ve got some leverage.

I am also curious what impact this might have on conversations Billabong/Oaktree is having, if any, about buying Rip Curl.  I don’t necessarily want to see it happen, but a deal to combine Quik, Billabong and Rip Curl makes a bit more sense to me if Billabong is private, as the other two already are.

Billabong and Rip Curl; A Tale of Two Surf Companies and Their Interesting Juxta Positioning

A few weeks ago, you no doubt saw the reports that Billabong (which would mean Oaktree Capital Management– the controlling investor in Billabong) was doing due diligence on Rip Curl as a possible acquisition.  Oaktree, of course, is also a major investor in Quiksilver.

When Oaktree invested in Billabong, there were some rumblings about combining it with Quiksilver, but nothing ever happened.

Meanwhile, we have a bit of information on Rip Curl’s earnings and last week, and Billabong held its annual shareholders meeting where Chairman Ian Pollard and CEO Neil Fiske reviewed the full year results.  Those results were released back in the middle of August and I wrote this article about them.

Ian’s and Neil’s respective speeches didn’t tell us much new about the year’s results.  My take continues to be that Billabong is doing all the right thing but it’s taking longer and being more expensive in a market that continues to be tougher than they hoped it would be by this time.  Companies incur a boatload of expense these days just doing the things they have to do to earn the right to compete.

We did learn that the Billabong, Element and RVCA brands together generate 91% of Billabong’s wholesale revenue.  That’s a reason I continue to expect to see the company sell more of its small brands; the remaining brands don’t appear significant to the company’s overall results.  I further doubt they can afford to invest in them, and it would be contrary to their continuing plan to focus on the big three.

One thing I did remark on in my article was that debt was getting closer to maturity, and that a whole bunch of stock options held by people who would like to recognize value from them were under water and getting closer to their expiration dates.  Chairman Pollard addressed the debt in his meeting remarks:

“Directors continue to consider options related to the Company’s term loan, which matures in a little under two years. This is a priority for the Board, and with the assistance of our advisers we are well-advanced in assessing various options, with the focus on maximizing shareholder value. Whilst considerable progress has been made in this regard, we are not in a position to make a statement to shareholders today. We propose to update shareholders on the outcome as soon as practicable.”

It’s clear from this comment as well as from Billabong’s most recent financial statements that Billabong doesn’t have the money to buy Rip Curl unless that money comes from Oaktree.  But if Oaktree lent Billabong money to buy Rip Curl, that just ends up adding more (expensive?) debt to Billabong’s balance sheet and increasing their interest expense.

How much to buy Rip Curl (a private company remember) anyway?

According to this article, Rip Curl “…generated $485m of revenue in the past financial year and some estimate that it could sell for as much as $450m.  Three years ago, it was generating $23m in annual net profit.”  However, an article in the Australian reported that 2017 profit was $18.44 million, up from $10.058 million the previous year.  Remember those numbers are in Australian dollars.

Mr. Eli Greenblat, in his November 1st article in The Australian (which I can’t seem to find a link to) makes it clear that Rip Curl’s owners are proactively trying to sell the company.  He noted, “Rip Curl has resisted being dragged into discounting which can crunch margins.”

He’s right.  Once again, we see the value in this market of being a private company, which Quiksilver is now, Rip Curl always has been, and Billabong isn’t.  Here’s what I wrote back in 2015 about how Rip Curl responded to tough times.  They could do what they did precisely because they were private.  It worked.

Billabong would be better off as a private company, but I don’t see a path to privatization that makes sense to Oaktree.

Just because we haven’t heard anything in a month doesn’t mean Oaktree isn’t still kicking the tires.  There two basic kinds of buyers.  Financial and strategic.  Typically, strategic buyers pay more.  If Oaktree is a financial buyer in this case, then their interest will be focused on the return they can earn based on some growth and an exit strategy down the road.  But they are looking at a brand, profitable and stable as it apparently is now, that got that way by controlling its growth and distribution and sticking to what it knows how to do well- making surf products and selling them to surfers.  At least they are more focused on that than Billabong or Quiksilver.

So Oaktree is thinking, “Okay, we’re going to pay the owners a lot of money.  But that money is going into the pockets of the owners- not into the business to support growth.  But if they stick to what’s apparently made them successful, how do we improve the bottom line at an acceptable rate when revenue growth may be constrained in the name of protecting the brand?”

Sure, there may be some opportunities to cut costs, improve efficiencies and margins, etc.  But if revenue growth is constrained by the imperative of maintaining the brand’s market position is there enough bottom line improvement to be had to justify a price of “…as much as $450 million?”  What little information I have makes me lean towards a “no” on that one.

What if Oaktree is more of a strategic buyer?  That’s not hard to argue given their investments in Quik and Billabong.  I have no information about it, but I have to believe there’s been meetings held and analysis done of some form of combination of the three companies.  They’ve been seeking synergies and projecting growth opportunities and imagining various efficiencies.  I would certainly have looked at the possibilities, though with caution.  My experience is that synergies and efficiencies are never quite as real as they looked, and there are some unexpected expenses.

And then…Yes!…Of course!… It’s so obvious!  We’ll be the dominant surf company in the world controlling, oh, I don’t know, a whole bunch of the market.  We could be publicly traded on the New York exchange.  Course, we’d have to grow 10% or more a quarter, but we’d be so big and strong that what could go wrong with some expanded distribution…………………….

Get a grip Jeff.  We’ve seen that movie.  It’s a tragedy and everybody dies in the end.  Remember what the Australian academics who took a rigorous look at the market concluded.

I’d be asking if owning the three largest brands in the surf market that compete against each other doesn’t mean that you’re in danger of finding yourself in some kind of zero sum game, where the success of one of your brands comes at the expense of another.  Maybe you can argue the target market is bigger than the surf market.  Certainly Quik owned DC isn’t a surf brand.  Neither is Billabong’s Element brand.  But Rip Curl, we’ve learned, fixed its problems by focusing on the core market it knows.  That strategy is certainly appropriate to a big chunk of Billabong’s and Quiksilver’s business.

This article turned into rampant, but kind of fun, speculation.  It will be interesting to see if, to whom, and for how much Rip Curl sells.

Core Versus More; A History of the Surf Industry

Perhaps I bring the most value to the industry when a reader sends me something they think is important but that they don’t want to be directly associated with.  And they figure, “Send it to Jeff!  He’ll publicize anything.”

Most of the time, they’re right and this is one of those times.

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More of the Same; Billabong’s Results for the Year

Here’s what I said six months ago about Billabong:

“Six months ago [talking about a year ago], reporting on Billabong’s results for the whole year, I said this was a challenging turnaround, Billabong was doing things right, they were starting to see results, but the market was tough, and implementing their plan was taking longer and costing more (perhaps because it’s taking longer) than they’d initially expected.  That’s all still true…”

And it’s still, still true as we review the results for the year ended June 30, 2017.  I thought the delay was especially highlighted in Billabong’s July 28 “Omni Update” press release where they noted they’d “…terminated the agreement with the Omni-channel solution provider…” and taken a write down of AU $11.7 million as a result.  Billabong continues to try and change the engine oil while driving the car.  Tough task- but it’s what they have to do.

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Billabong’s Six Month Report: The More Things Change, the More They Stay the Same

Six months ago, reporting on Billabong’s results for the whole year, I said this was a challenging turnaround, Billabong was doing things right, they were starting to see results, but the market was tough, and implementing their plan was taking longer and costing more (perhaps because it’s taking longer) than they’d initially expected.

That’s all still true for the six months ended December 31, 2016.

I’ll start with the numbers as reported (numbers in Australian dollars).

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Billabong’s Annual Meeting: The Future’s Still Coming

Billabong held its annual meeting on November 22.  Back in August, I reported on Billabong’s results for the year ended June 30.  Here’s the link to that article.  The headline numbers then (all numbers in Australian dollars) were revenue from continuing operations of $1.10 billion and a net loss after tax of $23.7 million.  I started that article with these points which seem just as relevant now as they did then.

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The Future Isn’t Here Yet: Billabong’s Results for the Year

Billabong published its results for the year ended June 30th last week.  The headline numbers (all numbers in Australian dollars) are revenue from continuing operations of $1.10 billion and a net loss after tax of $23.7 million.  The numbers for last year (pcp- prior calendar period) were revenue of $1.06 billion and a profit of $4.15 million.  Pretax loss actually declined from $20.2 to $15.9 million.  Those are the numbers from the consolidated income statement.

However, those summary numbers are not the whole story.  There are the usual discussions to be had and adjustments to be made (or not) with regards to taxes, exchange rates, discontinued and sold operations and the inclusion or exclusion of the “significant” items.  Before we have fun with all that, how about we take a moment and look at Billabong’s overall situation?  It’s kind of like I’m doing my conclusion first, but I think having this stuff in mind will help you understand Billabong’s challenges and opportunities when we start to get down into some of the weeds.

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Billabong Sells Sector 9 and Lets Fly with a Press Release

Well, the press release was back on June 3rd.  And the sale of Sector 9 was, I guess, a week ago.  Happily, it’s not my job to be timely, but to give you things to think about with the goal of maybe helping you do better business.

So let’s think about Billabong.  Back when CEO Neil Fiske took over, there was a decision early on to focus on their big three brands- Billabong, Element and RVCA.  Good decision, I thought.  Most recently, they’ve sold Sector 9 for US $12 million.  As I’ve written previously, I expect the sale of additional brands.  Some of them may be small enough that a formal announcement of the sale won’t be required.  Maybe they are already gone.

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Good and Bad- Billabong’s Six Month Results

Billabong presented its results on February 26th, which is a day before I took off for a week in Scottsdale to golf and have a drink or two with old friends. As usual, a lot seems to have happened while I was gone, and I’m working to catch up.

I agree with Billabong CEO Neil Fiske who said, “There are important positives to report among a mixed overall result this half.”

Let’s right get to the numbers as reported and then as adjusted. In this discussion, I’ll rely mostly on the formal financial report with the audited financials. All the numbers are in Australian dollars.

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Billabong Holds Its Annual Meeting; Progress and Headwinds

At Billabong’s annual meeting a couple of days ago, CEO Neil Fiske and Global Billabong Brand Manager Shannan North made presentations describing the company’s progress and challenges since the results for the year ended June 30 were announced in July. Let’s see what they said.

It’s only been four months since the year’s results were presented so, as CEO Fiske put it in his opening remarks, “The themes of our presentation today are not new.”

He reemphasized that the turnaround, while taking hold, was a long term effort. “We said a couple years ago that this was a complex difficult turnaround. That it is going to take time to build the foundation necessary to sustain growth and margin expansion.” Below is the list of areas, taken directly from the presentation, where the turnaround continues to be focused.

  1. Brand
  2. Product
  3. Marketing
  4. Omni-Channel
  5. Supply Chain
  6. Organization
  7. Financial Discipline

If you’re looking for more detail on these, you can see Billabong’s earlier discussions in documents on their investor web site, and I’ve reviewed them in previous articles on my web site. I’m sure we agree that all seven are important. But in which areas can Billabong do something better than other industry companies? Where can it build a sustainable competitive advantage?

Overall, I believe that size is now an advantage in this industry, if only because of the investment in systems and in the omnichannel that’s required. Billabong, compared to most industry companies (depending on how we define the industry) has that going for it. I’ll also say I think Quiksilver’s problems have given Billabong an opportunity in some markets.

Starting from the bottom of the list, financial discipline gets easier as your balance sheet gets stronger. Billabong’s has certainly strengthened and I note that they are funding marketing programs through reduced expenses in other areas. Sounds like financial discipline to me.

I’ve no doubt there is money to be saved through revamping both the organization and the supply chain. But these are things other companies can and are doing as well. If you see these as a long term competitive advantage, it’s because you believe Billabong’s revamped management team can do it better than competitors.

Neil thinks that “over the next several years” they can get to the point where they are spending $30 million less annually on sourcing and logistics. He thinks they can cut their product lead times by 30%.

Making good product seems like the price of entry. Not something you can do better than others in the long run- you just have to do it to have the chance to compete. You can come up with some product innovations from time to time, but I doubt you can keep your competitors from doing the same.

Branding is a place where Billabong has an opportunity. This has a lot to do with their organizational changes. As Neil Fiske put it, “We are moving from a fragmented and regional business to a brand led, global company focused on building big powerful brands and maximizing their reach.”

The focus on what they decided are their three strongest brands with the greatest potential- Billabong, Element and RVCA- allows for certain efficiencies in all areas of the business. Remember, none of the seven strategies stand in isolation from each other.

Billabong is 52% of the company’s wholesale business, with each of Element and RVCA representing 16%. I suspect RVCA has the most growth potential. It’s not closely tied to a single activity like the Billabong and Element brands. In this regard, I thought Shannan North’s comment, talking about the Billabong brand, that “The brand’s turnaround is as much based on gross margin expansion as it is on revenue growth…” was interesting and appropriate.

For now, the Billabong brand (and I suspect Element as well) will be focused on its core (I still hate that term) market. At some point, with that further solidified, it will be interesting to see if they have the ability to break out of their core positioning without damaging that positioning. That’s pretty much the challenge for any brand in this industry as it grows, isn’t it?

Okay, omnichannel. Yes it’s important. As Neil puts it, “…probably the biggest game changer. Being able to connect all our channels – retail, wholesale, and ecommerce – to give the customer a seamless brand experience. Anytime, anywhere. Bricks and clicks. Content and Commerce. Social, mobile, local. Knowing our consumer like the back of our hand and being able to engage them on their terms, the way they want to interact. Omni is about unlocking the full value of the multi-channel shopper from one global unified platform.”

If Billabong was doing it badly, they need to do it well. Again, I’ll ask if that’s a source of competitive advantage or something you have to do well to compete.

2016, we learn, “…will be a year of heavy implementation on our big initiatives,” as CEO Fiske puts it. But, he points out, “…we have a set of external market challenges that must be met and overcome. Here’s what he says they are.

Billabong Holds Annual Meeting 11-15

 

 

 

 

 

 

 

He says, “Last year at this time, the Australian Dollar was 87 cents to the US dollar and the Euro was 1.25 to the US dollar. Today the Australian Dollar is closer to 71 cent and the Euro closer to 1.07 Euros.” The problem, he says, isn’t so much the level as it is adjusting to the new level when currency values change quickly. I agree.

“Our second challenge,” he continues, “is the sector weakness we are seeing in the last several months in North America. This includes the big action sports chains, department stores, teen retail, and tourist retail. Specialty retail, where we hold the number one position, is better but still relatively flat and cautious. The hardgoods market in skate has been particularly slow in the first few months of our fiscal year and this has hurt sales of both Sector 9 and Element skateboards.”

Finally, he notes that “…price discounting and promotion online and in the mall remain high and the consumer is waiting for deals. We don’t intend to enter the fray. We will stay focused on quality products, quality distribution, and price integrity… on strengthening our brands with the core consumer.”

I like that decision. If you’re focused on building big brands, how else can you approach it?

The overall financial result is that EBITDA for the first four month of this fiscal year is $2.5 million Australian dollars less than what it was last year.

Billabong is working to pull off a complex turnaround in market conditions that are not improving quickly if at all. Though their balance sheet is restructured, they are not without financial constraints on what they can do and how quickly. I like their plan and focus. Anybody who expected to see faster, stronger results in this economy was kidding themselves.

The thing I wish I understood better is where they are going to be able to consistently do better, not just as well, as their competition. I’m also wondering if Billabong and Element can find ways to eventually expand beyond their surf and skate franchises with the brand positioning they are working so hard to manage intact. If there is some constraint on revenues growth by these two brands (perhaps offset by improved margins and profitability even with lower revenue growth), maybe some of their other brands, in addition to RVCA, will step up and surprise us.