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Suitors send Billabong skyward

Despite now having two confirmed suitors, Billabong is still trading below the tentative $1.45 per share bids from TPG and a rival party which has chosen to remain anonymous.

Shares were trading 10 cents higher at $1.37 after the company announced this morning that the board had received an indicative, non-binding and conditional proposal from another party which has already signed a confidentiality agreement and is expected to commence due diligence at any time.

Bain Capital and KKR have been reported as potential suitors.

TPG commenced due diligence last week following the release of Billabong’s full year results and organisational overhaul designed to get the apparel provider back on track after a disastrous foray into the retail channel.

New chief executive Launa Inman announced plans last week to completely revamp the company, slashing brands and costs to simplify its operations. If she succeeds, Billabong is expected to return to positive sales territory in four years with earnings before, interest, tax, depreciation and amortisation (EBITDA) 250 per cent higher than the $84 million reported for the 2012 financial year.

The company announced a loss of $275.6 million in the year to June and said it would close an additional 82 stores as part of an ambitious turnaround strategy to counter a slump in sales in Australia and weak growth overseas.


Billabong’s board reiterated today that it does not consider that either proposal, which values the company at around $700 million ‘‘reflects the fundamental value of Billabong in the context of a change of control transaction’’.

There is no guarantee either party will make a formal offer for the company after due diligence, or, if they do, match their $1.45 indicative bids. "The board does not intend to make any further announcements unless and until a recommended offer is secured, or unless there is a development which it considers requires disclosure," the company said.

It said this process is expected to take several weeks. Since TPG's first approach in February, Billabong has sold half its of watch brand Nixon, issued a profit warning, hired a new chief executive and raised $225 million in equity to reduce debt.

TPG had offered $3.30 per share in February but Billabong rejected it, saying it did not reflect the company's underlying value. 

Analysts from Citi were upbeat after last week's earnings result and strategy update about the prospect of higher offers emerging from private equity interests. ‘‘We do not see private equity walking away.Its plans are likely the same as Billabong’s, which is margin recovery,’’ said Citi’s Craig Woolford. 

‘‘Assuming 400bp of EBITDA margin uplift and flat sales, we see an LBO (leveraged buyout) providing a 27 per cent IRR (internal rate of return) at $1.60 per share. The IRR remains a firm 25% at $1.80 per share.’’ 


Among the possible suitors is Bain Capital, the private equity group founded by US Republican presidential nominee Mitt Romney, which has a history of participating in complex turnaround deals.

Shares in Billabong has been pummelled in recent years as sales stall and business volumes wither. As recently as October 2010 stock in the company was trading at $7.16.The share slide helped trigger shake-ups in the board, with ex-Target executive Launa Inman brought in to replace Derek O'Neill as managing director and chief executive officer in May.

with BusinessDay and Reuters