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TPG takes second bite of Billabong, who’s next?

US private equity giant TPG has made a second bid for Billabong International (ASX: BBG), according to today’s Australian Financial Review (AFR). The offer is priced at $1.45, well below the company’s $3.30 offer made in February 2012, and a 32% premium to the last traded share price of $1.10.

The AFR has suggested that major shareholders, Colonial First State and Perennial Value, with a combined 12.5% of the company, have informally committed to support TPG’s offer. The stumbling block will be Gordon Merchant, Billabong’s largest shareholder with 15.6%. Without his support TPG have virtually no chance of getting the deal across the line. Having knocked back the previous offer, Merchant said in February that he felt bad about the whole situation, and announced that he would be prepared to accept a lower offer. Whether he’s willing to accept the current offer is yet to be seen. The Billabong board have also advised the market that they will provide an update, following consideration of the proposal.

Thanks to its recent capital raising of $225m and sale of half of its Nixon Brand for US$285m, Billabong has reduced its net debt from $526m to around $100m. Combined with its current stable of well known brands, the price certainly looks attractive to TPG.

Who’s next?

Following the farcical takeover offer for David Jones Limited (ASX: DJS) back in late June, private equity could still be attracted to the retail sector. With retail stocks being heavily sold off and on the nose with investors amidst weak consumer sentiment, it’s perhaps not a bad time for private equity to come knocking.

David Jones’ shares are currently trading at $2.35, not far off 52 week lows of $2.10, while Myer Holdings Limited (ASX: MYR) shares are well off its 52 week high of $2.71 and currently trading at $1.66.

David Jones is more likely to be a target than Myer, thanks to ownership of its own stores, which are valued on its books at over $400m, but some analysts have speculated that the property could be worth up to $1 billion. My colleague, Scott Phillips, has written a thorough article on the subject here.

JB Hi-Fi Limited (ASX: JBH) is trading at about half its 52 week highs of $16.82 – the last traded price was $8.53. Should Woolworths Limited (ASX: WOW), not be able to find a buyer for its Dick Smith Electronics division, JB Hi-Fi may not be a bad purchase. It’s run efficiently, with a low cost of doing business, and seems to be rationalising its stores as well. (As a little bit of scuttlebutt, I’ve noticed at least two ‘big box’ or warehouse type JB Hi-Fi stores in my local area that are closing down).

Woolies could combine the two, cherry pick the best stores and locations and close the rest. As at 1 Jan 2012, Woolworths had $922.7m of cash on its balance sheet, more than enough to buy JB Hi-Fi, with a market cap of $840m. For the six months to Jan 2012, Woolworths also generated $1.7 billion in operating cash flow, so the purchase could be funded by future cash flows.

Foolish takeaway

With retailers’ share prices down so much and the whole retail sector on the nose, we could see more takeovers, mergers and acquisitions, similar to TPG’s current bid for Billabong.

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Motley Fool writer/analyst Mike King owns shares in JB Hi-Fi and Woolworths. 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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