Billabong’s Upcoming Half Year Report and Their Choices

Sometime late afternoon West Coast time, Billabong is going to release their half yearly numbers and have a conference call on those results. In the meantime, as most of you may know, trading on their stock has been suspended pending an announcement. That announcement may have something to do with this article stating that Billabong has received a US $820 million takeover offer from TPG Capital.

All I know is what’s in the article. But I thought in light of the pending news and possible acquisition of Billabong, it might be useful to review their choices before the announcement.

Back in December, when Billabong announced that they had some issues and were pursuing a review of their options, I did a pretty detailed analysis about what was going on. You can read that here. We haven’t seen a complete balance sheet, so we don’t know the extent of the problem. But when you’re dealing with issues of capital adequacy, there are only so many things you can do. In no particular order, here they are.
You can raise some expensive money along the lines of what Quiksilver did with Rhone.
You can sell the company as the article referenced above suggests might happen.
The trouble with both these choices, of course, is you don’t get a very good price. But then you may not have a choice.
You can cut expenses across the board to improve cash flow. What we don’t know, since we don’t know the exact size of the problem, is whether this could have enough impact quickly enough. My guess is no. And of course, this has an adverse effect on the company’s ability to pursue its strategy.
You could sell a brand. But Billabong’s whole strategy is focused on putting those brands into their growing retail channels. So every brand less it has makes that strategy a bit less valid.
Maybe it could take one of those strong brands it owns public to raise capital. That way they wouldn’t lose control of the brand. But as I am sure you all know it’s a tough time to take a company public. Somebody suggested that alternative to me. Wish I’d thought of it myself.
In a few hours, we’ll be able to put some numbers on the problem size, and maybe the solutions will have been announced. But let’s review quickly, in the interest of making the article I’ll write when the report and conference call happen shorter than a novel, how they got here.
First of all, the Australian dollar got strong, and the worldwide economy weakened, with the Australian economy being the last to follow others into recession. You can’t blame Billabong for that, but they have to manage the consequences.
Second, they chose to purchase West 49 because, well, it was available and consistent with their strategy. Had it not appeared on their radar screen, I don’t think they would have been pursuing an acquisition of that size with its issues. And, as I’ve written, I think those issues turned out to be worse that Billabong management expected.
Third (and this is true for most of us) there was an expectation of more of a global recovery than happened.  One consequence is that the acquisitions they have made start to look expensive in light of our current economic reality. That is, the prices are harder to justify because the future cash flows don’t look as strong. This impacts the company’s value as Billabong looks for solutions to its debt/cash flow problem.
And finally there’s the issue of whether or not the strategy of putting owned brands into an expanded, owned, retail base made sense.  I thought it did (though I wasn’t particularly happy about the implied impact on specialty retailers).
But, as I discussed a long time ago, the devil of that strategy’s implementation was in the details. How much of your owned brands can you put in a retailer before it’s perceived as a Billabong store regardless of the name on the front? How do you handle the other brands those owned stores carry when you’re trying to make room for your own higher margins brands?   How do they feel, as one of those non-owned brands, about being in those stores and the way your brand may be merchandised? I am sure Billabong management spent, and is spending, time on those issues every day.
If the economy hadn’t gone quite so far south or had recovered a bit quicker and the Australian dollar wasn’t through the moon would things be okay? That would depend on facts I don’t have. When we get Billabong’s numbers, we aren’t going to be able to conclude that the strategy was “good” or “bad.” All we’ll know and I guess we know it right now, is that they ran out of time to pursue it as their balance sheet weakened.
I’ll be all over Billabong’s report the minute it comes out, but I do like to read stuff slowly and take some time to think about it, so be patient with me.



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