When Doug Warbrick and Brian Singer were young blokes looking to spend a summer’s morning out on the waves of Torquay, I am pretty sure they wouldn’t have bothered paddling out when the surf was flat.
Which is why I am very surprised to hear that the pair has put their surfwear icon Rip Curl on the sale block at a time when beleaguered listed rival Billabong is desperately trying to orchestrate a sale and launch a company-wide restructure.
Typically, entrepreneurs try to sell their businesses when the surf is up – that is, when conditions in their industry are good, asset prices in their sector are strong and potential buyers are keen.
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The wrong time to sell is usually when the sector is struggling, earnings are falling and asset prices are down and investors/buyers are running a mile.
In the last 12 months, Warbrick and Singer would have seen Billabong’s sales fall 8%, its net profit turn from $119 million to a loss of $275.6 million and its market value tumble from $1.7 billion to $700 million.
Rip Curl’s own net profit fell from $15.5 million in 2009-10 to $7.9 million in 2010-11, according to its most recent accounts, with sales down 8% to $362.4 million. Presumably, the business has not been immune from the parlous retail environment which Billabong has battled for the last 12 months.
Yet Singer and Warbrick have still decided this is the time to sell.
Exactly why they need to get out right now isn’t clear, but the $400 million price tag being floated about does look high. I would agree with The Australian Financial Review, which suggests $300 million is more realistic.
What Warbrick and Singer will need to do is to try and use the Billabong sale to their advantage by presenting their business as a much cleaner and stronger option for anyone looking to get into the surfwear business.
This will be done by pointing out a few key differences, including:
- The fact that Rip Curl has one brand as opposed to Billabong, which has a number. While this does give Billabong a few more growth options, Rip Curl can argue it as a much more focused business.
- Rip Curl has a much smaller company-owned retail footprint than Billabong (Rip Curl has less than 200, Billabong has more than 600).
- Rip Curl’s ownership structure could make a takeover easier. Singer and Warbrick own 72%; Francois Payot, a director and founder of Rip Curl Europe, owns 16%; chairman (and Australia Post CEO) Ahmed Fahour owns 2%; and the rest is held by other management. Billabong has a range of institutional investors, founder Gordon Merchant with 15.6% and plenty of mums and dads.
The question that most potential buyers want answered though is about potential growth – and in the current environment it’s not easy to answer.
The AFR says a flyer released as part of the initial sale process puts earnings before interest, tax, depreciation and amortisation at $40 million for the 2011-12 year, rising to $47 million in the current financial year.
Posting 17.5% growth is nothing to be sneezed at, although it’s worth noting that Billabong’s EBITDA could climb by as much as 30% and the improved earnings will be driven mainly by cost-cutting rather than sale growth.
In the end, selling Rip Curl and Billabong will come down to the past versus the future. These are two great, global brands with rich histories built over decades. But what are they really worth when the growth outlook is flatter than the waves on a pond?