The pressure on the board and management of surfwear giant Billabong has been turned up again this morning after private equity firm TPG confirmed it was lobbing a $3-a-share bid for the company. Confirmation of the bid comes just days after looks the company released a plan to shore up its balance sheet and fend off a private equity takeover by cutting costs and selling off half of its Nixon brand.
But Billabong’s plan has been been canned by investors including Perennial Value Management, who want Billabong’s chairman Ted Kunkel to enter fully into talks with TPG.
Perennial portfolio manager Grant Oshry told the Australian Financial Review that Billabong wouldn’t complete the sale of the Nixon brand to Trilantic Capital Partners for 90 days, giving it almost three months to step up talks with TPG.
“The window of opportunity is still open; there is a 90-day window with Trilantic to close,” Oshry told the paper.
Why are shareholders such as Perennial so keen to try and get the company sold off? Billabong’s major challenges are instructive for entrepreneurs of all sizes in industries that are undergoing structural change.
Billabong chief executive Derek O’Neill told the AFR he could see a bit of light at the end of the tunnel for the company. “The business model is changing and the online business is growing and will get further investment. I would like to think wholesale can pick up in Europe and Australia in a couple of years.” A couple of years? He’s right when he says it will take that long for retail to turn around, but that does illustrate the timeline that lies behind Billabong’s restructuring and cost-cutting initiatives. O’Neill and the Billabong board are asking investors for a lot of patience, and suggesting there are some initiatives to take now, but this business needs time. Based on Perennial’s comments, investors do look impatient.
The race to cut costs
Billabong’s plan calls for it to try and take $30 million worth of costs out of the businesses as quickly as possible, with up to 150 retail stores to close around the world and around 400 staff set to go – mainly from head office. Quite why the company didn’t believe this cost-cutting was necessary before the private equity takeover offer arrived isn’t clear, but investors are concerned that the cost-cutting won’t go far enough. For example, the company has chosen to continue to pay a dividend of 3c a year; something many investors want scrapped immediately. The other issue that while some internal costs can be cut, outside costs – such as cotton prices – are harder to trim. It’s a difficult battle to win.
The debt question
Debt acts like a weight on companies. It reduces your ability to be agile and flexible and can make turnarounds difficult, because you must be careful not to do anything that will upset your bankers. Billabong, which has about $600 million worth of debts, is effectively being forced to sell part of its Nixon brand to ensure it doesn’t fall foul of its loan covenants. The question is: will that sale buy the company enough time?
The challenge of short-term versus long-term
The Nixon sale might shore up the Billabong balance sheet, but analysts have also been quick to point out there is a danger that Billabong is selling its best brand and the brand most likely to grow in the future. This is a delicate balance – protecting the short-term at the risk of denting your long-term prospects. Billabong would argue it will still share in the upside of Nixon, given it will still hold 48.5% of the business. But selling even part of your best brand is a desperate measure.
The question of focus: sell or restructure?
In a company that is clearly struggling, management and the board have two distinct choices: fight to turn things around or engage with potential buyers in the hope of exiting with a great price. Billabong’s leadership appears to be heading down the turnaround path, but it seems certain that at least some of thefocus is going to have to be taken by finding and entertaining takeover offers. This creates a real conundrum. If you are not fully focused on the restructure, the turnaround will slow down. And if the turnaround does slow down, the price you can hope to get from a buyer may in fact fall. That’s why Billabong’s shareholders want any takeover bid seriously examined, and fast. If Billabong’s board can’t get a good price out of a potential buyer, investors may allow them to focus fully on the restructure knowing that option has been canvassed.