The Billabong Deal

As you have no doubt heard, Billabong has reached a deal with “…entities advised by Altamont and entities sub-advised by GSO Capital Partners1 (the credit arm of the Blackstone Group, and  together with Altamont, the “Altamont Consortium”)” to sell Dakine to Altamont, get bridge financing to pay off its existing syndicated bank debt, put together long term financing with Altamont and GE Capital, and to hire former Nike executive and Oakley CEO Scott Olivet as Managing Director and CEO of Billabong, replacing Launa Inman. 

Before we get into the all the gory details, here’s the link to the announcement on Billabong’s web site. It’s the first item under “Recent News.” And here’s what I wrote when we had an update from Billabong in early June.
I also want to remind you that it’s a little hard to evaluate the strategic significance of this deal because we don’t have Billabong financial statements, especially a balance sheet, to use. The fiscal year ended June 30, but we don’t yet know when the report will be released.
I’m going to use Australian dollars unless I say otherwise.
First, the Altamont Consortium is going to provide a bridge loan of $325 million. $289 million will go right out the door to pay off the banks. They are also going to buy the assets of Dakine for $70 million. That plus the part of the bridge loan not being used to pay off the banks means that Billabong gets $106 million in working capital.
Dakine was acquired by Billabong in August, 2009 for US$100 million. At the time, that was something like $120 million in Australian Dollars.  I’ll be curious to see what Altamont does with Dakine.  Wonder if they might not flip it to VF which, you remember, was a partner with Altamont early in the evaluation of Billabong.
The bridge loan and sale of Dakine are expected to be completed by this coming Monday, July 22. The loan expires on December 31, carries an interest rate of 12% and is to be replaced with the term loan discussed below. As part of the bridge financing, Billabong will issue 84.5 million options to the Consortium. That’s 15% of the company’s fully diluted capital. The option price will be $0.50 a share. The first tranche of options for 42.3 million shares was issued July 15th. The rest are part of the long term financing and each tranche will expire seven years after they are issued.
If the company is sold or makes a deal with somebody else before January 15, 2014, they’ve got to pay off the Consortium with a 20% principal premium. So I’m kind of guessing the deal will be with the Consortium. 
Okay, that wasn’t too bad. On to the long term financing.
Billabong has signed another commitment letter with the Consortium to provide a five year term loan of $281 million. This will include a “base commitment” $221 million and an “upsize” commitment of $60 million. The base commitment will carry an interest rate of 12%, but they can pay up to 5% of that “in kind.” That is, it can just be added to the loan principal rather than paid in cash. The upsize commitment carries an interest rate of 10% and has to be paid in cash. They will use this loan to pay off and replace the bridge loan.
The bridge loan, you will recall, is $325 million. The term loan is a total of $281 million so by itself it’s $44 million short of paying off the whole bridge loan. But wait! There’s more!
Billabong has also signed a commitment letter to issue a $44 million convertible note to the Consortium. There’s the rest of the money Billabong needs to pay off the bridge loan. The note will be convertible into “Redeemable Preference Shares” (RPS) once approved by Billabong’s shareholders. The interest rate on this note will be 12% and up to 5%, can be payment in kind. That is, it can just be added to the principal balance of the note.
Until the shareholders approve the RPS, the note will carry an interest rate of 35%, 25% of which may be payment in kind. With that kind of interest rate, we should expect to see Billabong scurrying to do a shareholders’ meeting for the approval. Once it’s approved, the RPS will be convertible into Billabong commons stock at $0.235 a share and will represent 25% of all shares outstanding (including options and the RPS). The RPS will pay a dividend of 12% of which up to 3% can be paid in common stock.
Of the 84.5 million options which are part of the overall deal, another 29.6 million will be granted on completion of the term loan with the balance of 12.7 million will be granted when the required shareholder approval is obtained.
The last piece of this is a Billabong commitment with GE Capital “for an asset-based multicurrency revolving credit facility of up to US$160m (A$177m) (“Revolving Facility”), subject to holding sufficient eligible accounts receivable and inventory as collateral.” I think that facility is available as quickly as they can get it into place, but it’s not quite clear.
My read on the change in Managing Director from Inman to Olivet is that the people providing the financing required an executive with extensive industry experience who would be immediately credible to everybody involved. In spite of Ms. Inman’s qualifications and significant accomplishments as an executive, it appears that what she accomplished during her tenure at Billabong wasn’t enough to create that perception. Altamont will also get two seats on Billabong’s Board of Directors.
Okay, so where does this leave us? If all this happens, the Consortium’s share in Billabong will be between 36.25% and 40.49%. That’s a lot of dilution for existing shareholders. We also know that Billabong will be paying a lot more interest expense. Working capital will increase by $106 million and they will have the asset based line from GE available.
None of this reduces the liabilities for store leases on the balance sheet, and I still expect West 49 to be sold. As to further asset sales, I have no idea. Ms. Inman had presented plans to streamline operations and reduce expenses substantially. From her description, I believe there’s money to be saved there, but we haven’t heard anything since the presentation of the plan.
Is all this “enough?” Altamont and the Consortium apparently think so and believe the debt load is manageable given their evaluation of the brands and their potential. But they are allowing some interest to be paid in kind just in case there are rough spots.
Of course, “the brands and their potential” is ultimately the only thing that matters. Perhaps we’ll learn something about that when they release their results for the June 30 year end.



6 replies
  1. Sean O'Brien
    Sean O'Brien says:

    I’ve read that Billabong has $651 million in debt facilities due to be repaid by July next year. Is that still true? If so, will this deal enable the company to meet that deadline?

    • jeff
      jeff says:

      All I know for a fact is that at December 31, 2012 they had borrowings, under current liabilities, of AUD $289 million. It was AUD $7 million under long term. We learned in their release on the deal that they were going to use the AUD $289 million bridge facility to pay off their bank loans, which were $289 million at the end of the year. This doesn’t include obligations for store leases that are not on the balance sheet. Where did you see the $651 million number? I haven’t seen that. If that were the number and it were due next July, I’m not certain Altamont would have done this deal.



    • jeff
      jeff says:

      Thanks for pointing me to the article. I’ve read it, I see the $651 million number, I don’t know where it came from and the article doesn’t say. I’ve checked the December 31 balance sheet again. Total liabilities, including everything they owe, on that balance sheet are AUD $719 million. If $651 is the debt I’m not sure how the Altamont deal permits them to pay it. I’ve emailed somebody in Australia who should know if it’s a good number and will let you know.


      • Sean O'Brien
        Sean O'Brien says:

        Thanks. I’m curious as to whether there’s one shred of fact to some of the Bizarro World comments being floated on other sites.

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