I’m back from the first combined Outdoor Retailer/Snow Show trade show in Denver. The most impactful thing I brought back from the show was the flu. You guys who had dinner with me Thursday night- let me know if you got it.
You know, last year I came home from Denver with what turned out to be pneumonia. Two years before that I was hospitalized in Denver with a staph infection in my knee. I don’t know- maybe I’d like to see us back in Vegas. I never got sick there.
Back in September of 2013, when Centerbridge and Oaktree invested in Billabong, there was some discussion/consternation about the possibility of Oaktree combining Quiksilver, which it already controlled with Billabong. Quiksilver’s name, as you know, was changed to Boardriders. It owns the Quiksilver, Roxy and DC brands. Billabong’s three largest brands are Billabong, RVCA, and Element. It also owns some smaller brands which I continue to expect will be sold. Probably easier to do that once Billabong is not a public company.
In the past, I’ve been more than willing to criticize trade shows, suggest changes, and express our mutual uncertainty as to what the role of trade shows should be and how they should perform that role. Even recognizing that the winter Long Beach Agenda typically has lower attendance than summer, I was surprised at the low attendance and the brands that did not attend. I also heard from more than the usual number of brands that attended only because they got free booth space.
How, when you increase your sales less than half of one percent (compared to the prior year’s quarter) from $152.1 to $152.8 million, do you manage to increase your net income 36.5% from $6.42 to $8.76 million even though tax expense rose by $1.38 million while operating with five less stores (220 total)?
Zumiez increased revenues and profits in their October 29 quarter compared to the same quarter last year. The more interesting strategic question is how (if a single quarter is indicative of longer terms trends) and I’d like to highlight three factors that I see working together, though they are typically discussed separately.
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
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.
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.
“Okay Diane [my wife], I give up. We’ve been trying to find a smaller house for two years in this stupid Seattle real estate market. It ain’t happening until next spring and I’m buying the cord of wood we need for our fire place to get through the winter (along with some red wine).”
Wood arrives. We get it stacked. Next day (you had to see this coming)- “Jeff, I’ve found our house!”
So she had. The house we’ve now bought went on the market September 28th, we were in escrow on October 12th, closed about ten days later, put our old house on the market (way more fun to be a seller than a buyer in Seattle right now) and moved into the new place November 6th. As the pile of boxes has diminished, I’ve once again turned to what’s going on in the industry.
Two months ago, I got an email from Dave Grant, the owner of Vermin Scooter Shop in Calgary.
“A what kind of shop?!” I thought. Scooter shop. Yep.
Like many of you, I remember all those years ago when scooters first made their appearance. Also like many of you, especially in the skate industry, I expected scooters to be a blip that went away. I recall how they followed the typical and expected trajectory- grew exponentially, got over supplied, crashed. That’s the end of that, many of us thought.
I enjoy hearing from you, even when you disagree. The exchange means that I learn something, too. Leave a comment on any of my posts to contact me directly.