It took Bain Capital an almost embarrassingly quick time to kick the tyres on troubled surfwear group Billabong and walk away. All of two weeks.
That’s embarrassing for Billabong because it not only appears to remove the prospect of an auction with the remaining suitor, TPG, but creates the appearance that Bain, after a quick look at the company, was so disturbed it ran away as fast as it could.
That isn’t necessarily the case. TPG has been stalking Billabong since the start of this year and would know the company as well as anyone outside of it and it’s still there and is still conducting a due diligence process that self-evidently is more exhaustive than Bain’s, given that it both informally and formally started earlier and is continuing.
TPG also has a lot of experience with retail businesses, here and offshore, to draw on and may be more comfortable that it can execute a turnaround and extract the considerable upside latent within Billabong than Bain, even in a global economic environment studded with significant risks. Certainly, in two weeks Bain couldn’t have collected the insights TPG would have into the business.
Billabong, if it can be turned around, won’t be an easy or quick or riskless play. Billabong’s new chief executive, Launa Inman unveiled a strategy to generate incremental earnings before interest, tax depreciation and amortisation of more than $155 million in a strategy presentation delivered in August – but the plan is a four-year plan that involves an investment of $80 million.
So there is a lot of potential upside in Billabong but extracting it involves both meaningful lumps of capital, significant risk and quite a considerable period of time. TPG has shown previously, when it acquired a very run-down Myer, that it is prepared to contemplate exactly that kind of investment in return for a massive pay-off if it can execute the turnaround well.
Having “lost” Bain from the process, Billabong has only two options. It’s either TPG or it will have to go it alone.
It is conceivable that now that Bain has departed TPG might contemplate playing hardball and seek to drop its $1.45 a share indicate price that values Billabong at $695 million. Effectively, however, the Billabong board is in the same position that it was in before Bain surfaced and has the same negotiating leverage today that it had then.