I’ve resisted writing this, but with the recent article in Bloomberg highlighted by Boardistan and Shop-Eat-Surf reporting, also based on a Bloomberg, that Quik had hired a restructuring firm, I guess there’s no reason not to.
What I want to do is take you through Quik’s circumstances and choices based on their most recent balance sheet dated April 30, 2015 We’ll seeing another one shortly, but I doubt that’s going to change my analysis. I also want to consider with you what a “restructuring” might mean and how it impacts the industry.
Quik’s most recent balance sheet states there are 174,642,124 shares of common stock issues and outstanding. That’s not a fully diluted number, but let’s work with it. As I write this (September 4) Quik’s stock is trading at $0.46 a share. Multiplying that price by the number of shares outstanding gives us a market capitalization of $80.3 million.
Now let’s suppose that all the shareholders of Quik’s common stock- every last one of them- offered to give me their shares for free. And let’s further assume that somehow when I got all those shares for free I wouldn’t have to pay income tax on $80.3 million in income.
How would I respond to the offer? Very, very carefully. If I accepted, I would become the owner of all of Quik’s assets- and its liabilities.
The liabilities total $1.153 billion, and I can guarantee that they are mostly very, very real. The largest is $785 million of long term debt. Total assets of $1.139 billion are less than liabilities. Hence the negative equity on the balance sheet.
In any kind of restructuring, we’d have to take a hard look at those asset values. Okay, I believe the $48 million in cash on the balance sheet is probably worth $48 million no matter what. I’m not so sure what the fixed assets of $190 million, the intangibles of $138 million and the goodwill of $80 million would be worth.
There’s also inventory of $291 million and receivables of $252 million. In any sort of a messy restructuring, would those be worth 100 cents on the dollar? My experience is that they would not, but it depends on just how things come down.
So were I to accept the offer, I’d own a company that wasn’t making any money and, realistically speaking, had assets that were significantly less than its liabilities. Sounds like a bad deal.
That’s why I am not expecting, and have not been expecting, any kind of offer to buy the equity. You’d just have a new shareholder with the same problem the current shareholders have.
Unless you think that the three brands- Quiksilver, Roxy and DC- have value well in excess of what they are carried for on the balance sheet.
Whoops- as I sit here writing this Shop-Eat-Surf has just published a story that says, “Quiksilver cuts jobs, stops severance payments.” To me, that’s further indication of their cash flow issues (not new) but also may have to do with ongoing negotiations.
Anyway where was I? Oh yeah- the value of the three brands. What I’ve said in the past is that all three brands have value, but that it would be easier to recognize that value as a private company. I’m pretty confident there’s no reasonable valuation that generates a sales price of a brand that solves Quik’s balance sheet problem. The sale price goes to pay down debt and leaves the company proportionally with the same problem on a smaller scale.
There are buyers for all three brands, but probably not at a price that does Quik any good. I’d love to be wrong and think we’ll find out if I am pretty soon.
You can see what’s going on. Quik has continuing and worsening cash flow issues. It’s in a lousy negotiating position. What I assume are ongoing negotiations and analysis is dealing with exactly the valuation assets I’ve raised for both the balance sheet accounts and the brands under different scenarios.
My best guess is that there’s no reasonable valuation a buyer will accept that can work without a restructuring of the debt, through whatever vehicle and in whatever form that might take. Quik management and the restructuring firm will be negotiating not just with potential buyers but with the secured creditors to try and put such a deal together.
As an industry, we have to be concerned about what happens to Quik’s three brands. We’d like them to end up where they could be nurtured a little to recognize their value, rather than blown up in distribution. It’s already been disconcerting for me to walk into Fred Meyers and see Quik and DC kids’ stuff on the racks and discounted in the Sunday newspaper ads.
I’ve highlighted for some time now what I see as a conflict between building a brand and being a public company. The way you rebuild brands in our current environment- like Billabong and Skullcandy are trying to do as public companies- is to pull back on distribution to better position the brand and improve margin while reducing expenses. But this requires some patience and I don’t think it lends itself to valuations that solve Quik’s problem.
Quik’s last financial statement reporting was in early June, so we should be seeing the next one any time. There’s going to be some kind of deal, and I don’t see how it can avoid involving some restructuring of debt. Let’s hope that whatever form it takes, the brands are still positioned to be supportive of the industry.