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Billabong extends takeover talks

Surf wear maker Billabong International (ASX: BBG) has announced that it has extended talks with takeover party Sycamore Partners.

On April 9, Billabong announced that it was entering into a ten business day period of exclusivity with a consortium comprising Sycamore Partners and Paul Naude, President of its US operations. Sycamore has proposed to acquire 100% of Billabong’s shares for 60 cents per share, or at the election of shareholders, scrip in a Sycamore affiliate. That period of exclusivity ended yesterday, with Sycamore requesting an extension for a further 10 business days, due to conclude on Wednesday 8 May.

Sycamore is in the process of completing a quality of earnings report, which is expected to be finalised before the May 8 deadline.

Shares in Billabong are trading 1% lower in morning trading at 47.5 cents, suggesting investors have little confidence in the proposed takeover going ahead. The prospects of a final bid lower than 60 cents also appear to be rising, after the original bid of $1.10 was dropped to the current offer of 60 cents.

After receiving several takeover bids in the past two years, this may be the final straw for Billabong, although it is uncertain whether the board will recommend the bid. After appointing ex-Target boss Launa Inman as managing director in May 2012, and a new strategy in place to simplify the business, including improving its supply chain, reducing the number of styles and cutting the number of suppliers, the Billabong board may be keen to see the strategy through, rather than let the company go for a song.

The main issue for Billabong and its shareholders, should the bid fail to go ahead, is the company’s high level of debt. Its bankers may insist on an injection of capital – at the expense of shareholders, who may be unwilling to kick in more cash, after seeing the share price fall more than 80% in just the last year. By comparison, the S&P ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up over 16%.

Foolish takeaway

Billabong is a lesson for investors considering investing in stocks hoping for a turnaround in the company’s fortunes. Very few turnaround stocks actually ‘turn’, and as such are highly risky investment propositions. The recent recovery of stocks like Harvey Norman Holdings (ASX: HVN) and JB Hi-Fi Limited (ASX: JBH) and the subsequent rise in their share prices illustrates what can happen when some companies ‘turn’.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, 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.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in Billabong and JB Hi-Fi.

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