Update on Billabong: The TPG Offer

This is kind of fun. As you’re aware, TPG Capital offered to buy all of Billabong for $3 a share before the Nixon deal and other steps were announced. Billabong said no because the deal was contingent on too many things and they needed an immediate, certain solution to their short term balance sheet issue. But now, even with the Nixon deal happening, TPG still wants to buy them for $3.00 a share. What can we learn from that?

First, I guess we can conclude that TPG approves of the actions Billabong management has taken. And apparently they agree with Billabong management that the earnings lost from the sale of half of Nixon will be made up for by store closings and expense reductions being undertaken.

Or maybe the $3.00 a share was a lowball offer made on the assumption that Billabong needed to make a deal (which they did).
 
In what I published about Billabong yesterday, I said okay, great, they’ve solved their short term balance sheet problem, but we are left knowing almost nothing about how Billabong management views the prospects for their longer term vertical retail strategy. I guess we’re about to find something out.
 
If Billabong’s board of directors were to conclude that it’s in the shareholders’ best interest to sell the company for $3 a share (Or $4?) we’d have to conclude they aren’t all that confident in the strategy and their ability to implement it either because of anticipated economic conditions or because their balance sheet, even with the fix of a few days ago, won’t be strong enough.
 
Then there’s the issue of the whole competitive environment in the surf/action sports/youth culture market. I’m actually working on a longer think piece on this. My basic question (perhaps a bit exaggerated for impact) is with everybody trying to respond to weak consumer demand by selling everything they can everywhere (perhaps the wrong approach?) is there enough brand distinctiveness left to make a plaid shirt from a cool brand worth $20 more than the same plaid shirt bought at Target?
 
I remember when the skate hard goods industry was somehow caught by surprise as more and more skaters decided that a $30 deck was just as good as a $55 deck as they were essentially identical in construction and were going to wear out anyway.
 
Just because there’s an offer from TPG doesn’t mean there will be a deal. It is a very preliminary offer with a lot of work to be done. One thing that might be a stopper is the condition that the tax liability associated with the Nixon transaction not be higher than $10 million. Billabong has estimated that, at worst, it might be $45 million. I doubt they’d be willing to guarantee the $10 million number.
 
Somebody (thanks Somebody) sent me this article which discusses the deal in some detail. It’s worth a read. I’ll be watching with you to see how this all plays out.
 

 

 

13 replies
  1. Tim
    Tim says:

    Hi Jeff,

    Just wanted to say thanks for your input and insight in to this as well as all the other topics you tackle. I am super interested in how this all plays out and the long term effect on us as independent retailers, and specifically as an independent retailer who counts 3 of the Billabong brands as our top brands in there respective categories.

    Tim

    • jeff
      jeff says:

      Hi Tim,
      I don’t expect you’ve got to worry about losing the brands you’ve got and yes, this is going to be really, really, interesting. Wonder if the people at Quiksilver aren’t a little nervous?

      Thanks for the comment.
      J.

  2. rob valerio
    rob valerio says:

    Hey Jeff-

    Nice work front running this situation a few months ago. Crazy how this recession is pulling down even the strong players.

    I’m curious on a few fronts.

    Billabong was considered smart by moving to retail vertical back before the recession started.

    We all learned what Vans did by opening retail stores once you have enough brands or product to fill most of a store: guaranteed sales quarter after quarter. It’s nice not to have to rely your whole revenues each quarter to fickle retailers you don’t control. Plus you get a larger portion of your line in front of consumers. And if you’re good, the additional margin available at retail. But mainly reliable sales.

    We also know how expensive it is to close retail stores, thanks Mr. Rags and Pac Sun for that lesson.

    Now the question becomes, has action sports actually reached the maximum number of people that are interested worldwide?

    Was Nixon the most profitable non-core piece of the Billabong family? I say non-core thinking you don’t need a watch or headphones to surf, skate or snowboard. Are these non-core products needed to grow the companies outside of the finite number of participants and followers?

    Another question I have is whether action sports companies have done enough to move a significant portion of their sales to retail internet? In the footwear industry, internet sales are now 21.8% of retail.

    Looking around at retail, the companies that are doing well in the age groups action sports attracts are Urban Outfitters, or the American Eagle/Abercrombie/Forever 21 types.

    Jeff- Is the answer to action sports apparel getting a larger market that the companies have to figure out how to manufacture the clothes cheaper to compete with fast fashion companies?

    • jeff
      jeff says:

      Hi Rob,
      I think what we can see is that new people that action sports reaches are interested in fashion and style- not so much the activities themselves any more. That means our competitive universe is a lot bigger and is populated by a lot of really large companies. And yes, Nixon is the most profitable piece of Billabong. That was clear from some of the numbers they released.

      Rob, I think the answer is that if you want to be in the action sports market, then that’s a pretty small market made up of participants and perhaps the first layer of nonparticipants who closely associate with the sport. Once a significant percentage of your customers are beyond that group, you more and more in youth culture or fashion or something besides action sports.

      Thanks for the comment,
      J.

  3. Old Buddy
    Old Buddy says:

    The circus is back in town! You gotta love watching this from the sidelines. Chad and Andy did exactly the right thing. They are now back in control of their future again and can flip it one more time, maybe two? That’s a pretty cool thing and rare. Good to see good guys finish on top. This story (the Billabong problems) has been in the writing for quite a while now. It’s long from being over. Yes, the boys at Quik should be worried, but they should be worried about Iconics coming in not Nike or VF as there are no more real growth years ahead for Quik. The glory days are over. It’s hang on to what you have at any cost or grow again by going down stairs. Every brand has a life cycle and even great brands die. Mmmmm.

    • jeff
      jeff says:

      Hi John,
      Well, I’d love to respond with something erudite, but I pretty much agree with you. Only difference with Quik is that they are already in bed with Rhone.
      Thanks,
      J.

  4. Some Sombody
    Some Sombody says:

    So The Age (http://bit.ly/yjKCEZ) and The Australian (http://bit.ly/wOhIOu) have weighed in, casting doubt on the deal signing. For what that’s worth…. It will be interesting to see if TPG bids up to $3.42. Does 9.2 times earnings validate BBG’s strategy? My Magic 8 ball just shrugged its shoulders.

    • jeff
      jeff says:

      Hi Somebody,
      There’s lots of doubt as to a deal getting done. It’s very early in the process. No due diligence yet. Keep working the eight ball.
      J.

  5. Rob Valerio
    Rob Valerio says:

    Jeff-

    As usual your analysis feels right on the money. These action sports brands head towards $1 Billion in sales and now they have to compete with the big boys who are waaayyyyy better at delivering the volumes at the right price to the mainstream.

    Following up on one of your earlier posts, it seems like the interesting one to watch will be PPR’s Volcom. While Billabong and Quik revert to the core and its followers, Volcom has a parent that may take them successfully into the mainstream youth culture fashion world. Companies like Sole Tech stayed in the core market (etnies is as far as they strayed) and rides the up and downs but Billabong and Quik tried to be more.

    It will be interesting to see what portion of sales in vertical retail shakes out to be the right amount in action sports for these companies. 30%? 60%?

  6. Kel
    Kel says:

    It will be interesting to see if Gordon Merchant would give up his 37,770,098 shares in Billabong to sell them to TPG. When it has been his life for nearly 40 years. Must be a bit of an emotional time for the founder.

    • jeff
      jeff says:

      Hi Kel,
      Yes, it will be interesting and yes, there’s always an emotional component in situations like this.

      Thanks for the comment,
      J.

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