Billabong takeover dumped

Billabong International (ASX:BBG) has announced that takeover talks with Sycamore Consortium and Altamont / VF Consortium have ended, with no takeover offer resulting.

The surf, ski and skate wear company says it is still in discussion with both Altamont Capital Partners and Sycamore Partners regarding proposals for alternative refinancing and asset sale transactions, which could see Billabong sell off one or more brands or country assets, or undertake an equity raising. The company confirmed that it was already exploring the possible sale of its Canadian retail chain West 49.

Billabong says any proceeds would be used to repay in full the company’s existing syndicated debt facilities. According to its latest published financials, Billabong had over $280 million in debt. A reduction in debt appears to be a major concern for the company now, and it could already be in breach of its debt covenants. That could mean the company’s bankers are more in control of the company’s future than management.

Earnings downgraded

Billabong also issued a profit downgrade, with earnings before interest, tax, depreciation and amortisation (EBITDA) now expected to be between $67 to $74 million, excluding any significant or exceptional items. The company had forecast in February for EBITDA to be between $74 to $81m.

Australian retail conditions are tough with year to date same store sales falling 5.4%, and gross profit 2.3% below the previous corresponding period. Europe continues to be weak, especially for brand Billabong, while the Americas appear to be recovering slightly.

What investors will do now is hard to discern. While many are likely to have had enough of the ongoing dramas, and continuing disappointing performance, they are likely to jump ship. An equity raising now appears all but guaranteed, and is likely to be done at a lower price than whatever the current trading price is. That will dilute existing shareholders, unless they stump up more funds to retain their share.

Foolish takeaway

Uncertain times appear ahead for Billabong and there’s no guarantee that the company will come through the other side unscathed, if at all. On the other hand, if Billabong can turn around its business, cut costs and follow the strategy outlined by new boss Launa Inman, we could see a share price at multiples of the current price.

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Motley Fool writer/analyst Mike King owns shares in Billabong.

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