Paul Naude Offers AUD 1.10, Billabong Reduces Full Year Forecast

This is just intriguing. There is so much happening and it’s going on so fast (at least in corporate terms). It’s like a novel you can’t put down or a soap opera where waiting for the next episode to find out who does what to whom is excruciating. 

Like you, I’m working from the Billabong announcement and a couple of press reports so I have no solid information you don’t have. But I’ve always been a student (and sometimes a practitioner) of turnaround management and organizational evolution and this is fascinating. Dare I say fun (for me at least)?
All the numbers are in Australian Dollars.
Let’s start with a review. In February, Billabong turned down a $3.30 bid from TPG Capital (subject to due diligence) as too low. Subsequently, Bain and TPG withdraw offers of $1.45 after some due diligence (The TPG offer was made on July 24 and withdrawn on October 12.). Meanwhile, on April 12th, Billabong closed a deal to sell half of Nixon to TCP for proceeds of $285 million to be used to pay down debt. Former CEO Derek O’Neill departed the company on May 9 and Launa Inman was appointed Managing Director May 12. On June 21st, Billabong announced that it would sell shares at $1.02 (44% below the previous closing price) to raise an additional $225 million to pay down debt.
On August 12th, the company released and Ms. Inman presented Billabong’s half yearly results and plans for going forward. I wrote rather extensively about that.
Now Paul Naude, who took a leave of absence as a Director and President of the Americas on November 19, has made a contingent offer of $1.10 per share. When he did this last Friday, Billabong’s shares were trading at $0.73 each.
Just to increase the intriguing factor even more Billabong, at the same time they announced Paul Naude’s offer, released a trading update where they reduced their expected EBITDA from $100-110 million in constant currency to $85-92 million in constant currency. But that eighty-five to ninety-two million number is before $29 million of “significant items.” If you include those, the year-end constant currency range is from $56 to $63 million. The release does not describe the previous EBITDA estimate as excluding any “significant items.” As a result, I’d tend to compare that prior estimate to the $56-$63 million estimate. Using the midpoint of both estimates, that’s a decline of 43%.
The press release, should you want to read it yourself is on this page at the Billabong site. Right now, it’s the second on the list and is called “Bid Proposal and Trading Update.” This is the third time this year that Billabong has reduced its expected results. You can read for yourself the details of the causes in the release. We can sort of sum it up by saying soft sales and a lousy economy.
When I discussed Paul Naude’s decision to put together an offer back in November, I speculated that the offer price might be lower than what we’d seen before. Now I have to wonder, with the price of the stock having fallen since the downward revision of the year end results, if it might be reduced further. I also discussed briefly in that article just how a leveraged buyout, which this deal would be, works.
If I could ask Paul one question, it would be, “What did you know, and when did you know it?” It seems likely to me that when he took his leave of absence a month ago, he must have had some sense of the continued deterioration of business conditions. Yet the conditions under which he was allowed to pursue the deal required that he use no confidential information. Regardless of what he knew or was concerned about then, he had to put together his offer, and represent it to his potential partners, using only public information. That would have been the EBITDA estimate of $100 to $110 million.
Were I Paul’s partners (Sycamore Partners Management and Bank of America Merrill Lynch) the first question I would have asked in the first meeting was, “You were a director and the President of the Americas as Billabong’s performance went south. Now you’re coming to us and explaining how under your leadership this can turn into a really good investment. Explain to us why your really good ideas couldn’t be implemented.” 
I gather he had a really good answer. 
We’re a long way from a deal (Remember, I thought there would be a deal with TPG). Whether or not Billabong has to make a deal at some price depends on their balance sheet. If there should be a deal I’d expect the price to decline further as a result of the reduction in projected year end results. And I’m guessing you’d see some brands sold following the deal to pay down debt. The thing I’d be most interested to watch is how they’d propose to manage their brick and mortar retail.
I’ll keep watching and speculating right along with you.