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Billabong swamped: Should you buy?

Billabong’s shares have fallen 42% in the last 10 weeks, after private equity suitor TPG Capital lobbed an indicative $1.45 share bid for the company on 24 July 2012.

At one stage the shares had fallen 18% today alone, after the company announced that TPG Capital had walked away from its bid. Should Foolish investors take advantage of the all-time low price and buy?

First, a recap of the story.

TPG made its first bid for Billabong International Limited (ASX: BBG) in February 2012, offering $3 a share. After Billabong’s board rejected the bid, TPG came back with a revised higher bid of $3.30, but that too was rejected.

Then Billabong, under pressure from falling revenues and profits, and a mountain of debt, was forced into an equity raising at just $1.02 per share – a massive 44% discount to its then last traded price of $1.83. It was also forced into a sale of half of its best brand, Nixon for US$285 million.

TPG came back in July, offering $1.45 per share, less than half its previous offer. In September, a second bidder, rumoured to be Bain Capital, also offered $1.45. But just two weeks later, that second bidder walked away from its proposal. Today, Billabong announced that TPG had also withdrawn its offer.

With the share price currently trading around 84 cents, is there value left in Billabong? Perhaps, but its less than certain.

Successful turnarounds in retailing companies are few and far between. David Jones Limited (ASX: DJS), Myer Holdings (ASX: MYR) and JB Hi-Fi Limited (ASX: JBH) are all struggling with structural and cyclical challenges to their businesses now, and there’s no real sign that they have overcome those issues yet.

Billabong expects challenging conditions to continue during the 2013 financial year, but still expects to report EBITDA in the range of $100-$110 million, in constant currency terms. Looking further out, in 2016, Billabong is targeting EBITDA of more than $210 million, through a range of initiatives. These include simplifying the business, investing in key brands, building its global online platform and improving its supply chain.

The company has reduced its debt to more manageable levels, and has a stable of well known, respected brands. If the company even gets its half right, Billabong could be worth a punt for an investor prepared to wait for the company to turnaround its performance.

The problem is that two private equity companies, with access to much more inside information than you or I, have walked away, without even offering a lower bid. Until investors find out what it was those firms didn’t like, the uncertainty is likely to weigh on Billabong’s shares.

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