With Billabong’s share price trading at a fraction of what it was in 2007, an opportunistic buyout bid by private equity is the quickest way out for the company’s long-suffering shareholders.
Billabong, whose new CEO Launa Inman unveiled a turnaround plan just 10 days ago, now has two potential buyers.
The first, TPG Capital, made its intentions known in late June. It offered $1.45 a share, which was a 32% premium on Billabong’s stock, valuing the group at $695.6 million. Although Billabong allowed TPG to look at its books, the surfwear company also made clear it didn’t think the offer reflected the company’s underlying value.
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Luckily for Billabong, its odds of pushing the price up improved today, after a second buyer – rumoured to be private equity group Bain Capital, founded by presidential candidate Mitt Romney – emerged.
In its statement to the market, Billabong said the unnamed suitor had made an offer at $1.45 a share; that is, equal to TPG’s.
It’s not surprising there is interest. As Michael Jones tells LeadingCompany, nothing gets buyers more interested than the whiff of a distressed asset.
Jones is an insolvency practitioner at Jones and Partners Insolvency and Business Recovery, who sell distressed assets. The assets are generally a whole lot smaller than Billabong, but the principles of how you drum up a contest are the same.
“It’s extremely difficult to sell assets, and that swings right through the economy,” Jones says. “But bargain-hunters are out there,” Jones says.
“I’ve found that to sell, you say it’ll be cheap, which gets people interested, which pushes the price up.
“When we’re in a boom, the buyers are queuing up. Now houses are passing by without a single bid. I can’t tell you how many properties I’ve had for sale where the auction has come and gone and there hasn’t been a single hand go up.
“Sometimes, I want to start the sale at a dollar, and work my way up from there.”
Billabong is going for cheap. It was selling for above $15 a share in 2007. In 2010, it was at $12. And in February, company founder and substantial shareholder Gordon Merchant rejected a deal at $3.30 a share from TPG, saying he wouldn’t consider a bid below $4.
Yesterday selling at $1.36 a share, from lows of $1.10 earlier in the year, Billabong doesn’t have much further to fall.
When it comes to private assets, businesses have a lot more leeway as to how they go about getting the best price.
Jones recently had a hand in selling a distressed legal practice. Two senior staff were interested in the business, but weren’t making a move. He contacted every lawyer in town, and advertised the sale, with a tight deadline. Soon, there was plenty of interest. “With a big public company… as soon as there’s a buyer, someone else wants to buy. But they sniff around, and it goes on forever. If you can set a deadline on these things, they happen.”
To push buyers across the line, it’s sometimes useful to also set up a closed, or limited, tender. It involves getting the most credible buyers to agree to abide by certain rules, with bidding closed to everyone else. This can set a framework around first refusal rights, settlement terms, and the length of time taken to respond.
Two interested buyers poses a new set of challenges for the already stretched Inman, but no doubt this is a business conundrum she’s happy to have.