Private equity firm TPG Capital may walk away from its bid for Billabong International (ASX: BBG), after it found several issues during due diligence.

Shares in Billabong fell by more than 20% yesterday after the Australian Financial Review reported that TPG was considering withdrawing from the sale process for Billabong, but no formal decision to do so had been made. Billabong announced late yesterday that TPG has confirmed that it has not withdrawn from the sale process, but that it has raised some concerns, which it is discussing with Billabong’s management.

Given the historical issues with Billabong, the risk of potential problems was ever present. Just last month, a second bidder for the company, Boston based private equity company Bain Capital, walked away from the sale process. The risk that TPG will now lower its offer or withdraw it altogether is now much higher, although the company has been engaged with major shareholders and involved with the Billabong since February, suggesting it’s still an interested buyer. Should TPG abandon its offer, Billabong is likely to see its share price plummet.

Rival surf brand Rip Curl put itself up for sale in mid-September, hoping to realise a sale price of close to $400 million, as interest in the surf, skate and ski sector hotted up.

Billabong has seen its share price crumble by more than 90%, from over $16 in 2008, and is currently trading around $1.10, well below TPG’s offer price of $1.45 per share, showing investor concerns that the deal will fall through.

Billabong fell on hard times after expanding into retail stores and taking on too much debt. As a result of falling revenues, the company was forced to sell half of its Nixon brand for US$285 million and issue $225 million of new shares, to pay down its debt. Despite those moves, the company still has more than $460 million of debt, and its balance sheet is far from ‘safe’.

Like Fairfax Media Holdings (ASX: FXJ), Qantas Airways Limited (ASX: QAN) and APN News and Media (ASX: APN) before it, Billabong has been forced to restructure and focus on transforming its business. All four companies have reported losses this reporting season as they’ve been forced to either writedown the value of their assets or incurred additional expenses in turning around their loss making operations.

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Motley Fool writer/analyst Mike King doesn’t own shares in any stocks mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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