Billabong and Co: Throwing good money after bad?

Billabong shareholders are stuck between a rock and a hard place

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You have to wonder when ASX listed companies are going to get the message. Shareholders are the owners of the company, not some stakeholders that boards can thumb their noses at. Repeatedly, we see companies doing exactly that, and then they wonder why their share prices continue to fall and they struggle to attract retail investors.

Billabong International Limited (ASX: BBG) is the latest company to give its retail shareholders the cold shoulder. The company yesterday announced a non-renounceable equity raising, at a massive 44% discount to the stocks' last traded price of $1.83. The company is offering 6 shares for every seven shares held, at an offer price of just $1.02.

Shareholders have the option of participating, and contributing more capital to a company that may well struggle to stay afloat, or watch their holding in the company be heavily diluted, and the value of their share in the company decline.

While all shareholders will get the opportunity to participate at least, if they choose not to participate, their offered shares will go to the underwriters, and shareholders get nothing for it. If the offer had been renounceable, shareholders would have had the option of selling their entitlements on market to the highest bidder. Underwriters and sub-underwriters like non-renounceable deals, because they are assured to get any unwanted stock – and when they get heavily discounted shares, even better.

Billabong hopes to raise $225m to reduce its debts from $325m to $100m, as the company tries to restructure its business, close under-performing stores and reduce costs, in an effort to turn around the struggling surfwear group.

Just six weeks ago, the company said it would not need to raise equity, leading to  questions about quality of the new numbers and the judgment that's been applied in the past. For a business trying to reassure shareholders, it's not a good look.

Ten Network Holdings Limited (ASX: TEN), Echo Entertainment Limited (ASX: EGP) and Brambles Limited (ASX: BXB) have all recently raised capital to shore up their balance sheets, thanks mainly to too much debt in the first place. At least these three companies offered renounceable deals, giving shareholders the option to sell their entitlements, if they didn't want to throw good money after bad.

In each case, the business carried too much debt. What seems like reasonable leverage in the good times very quickly becomes a millstone around the business' neck when times get tough.

Yet another reason to hesitate before investing in even moderately indebted companies.

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Motley Fool contributor Mike King doesn't own shares in any companies 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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