BBG.AX - Billabong International Limited

[booth52]

Investor website:

http://www.billabongbiz.com/phoenix.zhtml?c=154279&p=irol-irhome

 

Billabong recently popped up on cnnmoney, with news they were writing down their namesake brand, and others, to zero.  Equally intriguing to me, Oaktree Capital was mentioned as part of a group looking to provide re-financing.

 

This article has a good summary of the situation the company is going through:

http://www.smh.com.au/business/billabong-perilously-close-to-a-wipeout-20130405-2hc9k.html

 

This website has several articles on Billabong; he's followed the company through much of the proposed offers and deals that were thrown about.

http://www.jeffharbaugh.com/tag/billabong/

http://www.jeffharbaugh.com/2013/09/02/2739/

 

Quick summary: the company went through a buying spree, acquiring brands like Element, DaKine (Dakine sold in the Altamont refinancing deal for A$70M), Nixon watches, Canadian stores West 49 (to be sold) and numerous others. Then sales went south, debt needed refinancing, posted huge losses/writedowns, suspended dividends, stock plummeted, and they are now going through refinancing of their debts and company reorganization.   

Several buyout proposals have occurred over the past two years, some were taken back after a closer look at the company financials:

Takeover proposals:

July 2012 TPG: $1.45/share, later withdrawn

Nov 2012 Paul Naude(former director)/Sycamore offer: $1.10 per share, later withdrawn after review of financials

Jan 2013 Altamont/VF (same VF below that purchased Timberland) offer: $1.10 per share

April 3013 Sycamore adjusted offer: 0.60 per share (later withdrawn)

 

Started looking at it last week.  Company situation is extremely fluid.  Agreed to terms for debt refinancing with Altamont consortium in July 2013.  Centerbridge/Oaktree comes in with a more company friendly offer.  Altamont deal was slightly amended to counter, and from articles/statements from the company appears to be the heavy favorite, for reasons not entirely clear.  Then just yesterday/today, Coastal Capital enters the fray.

 

Coastal Offer:

http://www.reuters.com/article/2013/09/02/australia-billabong-idUSL4N0GY0OJ20130902

http://www.theaustralian.com.au/business/companies/billabongs-325m-recapitalisation-plan-caned-as-rushed-unwise/story-fn91v9q3-1226709864394

 

Share price peaked at A$14.00/share in 2008, dropped to as low as 0.12 and is at 0.49 today, with a pop from the latest situation with Coastal Capital.

 

Enterprise value, according to yahoo is 410.71M (not sure how accurate this is.) EBIDTAI (impairments) per their financial reports, excluding the Nixon watches brand, is 72.9M for an EV/EBITDAI of 5.6.  Haven't accounted for potential share dilution, if favored Altamont deal goes through.

 

Searching for somewhat comparable recent acquisitions:

Timberland was purchased by VF in 2011 for EV/EBITDA of 9.3,

True Religion (May 2013) purchase  EV/EBITDA of 7.23

http://beta.fool.com/hoangquocanh/2013/05/28/is-true-religion-getting-a-fair-price/35289/

http://www.bloomberg.com/news/2011-06-13/vf-agrees-to-purchase-footwear-clothing-company-timberland-for-2-billion.html

 

Closest market comparables:

ZQK/Quiksilver: 2014 EV/EBITDA = 8.26 (see link for other comparables)

http://www.infinancials.com/en/financial%20ratio,Quiksilver,35080NU.html

 

Billabong founder Gordon Merchant is still on the board, is still a major shareholder, and has increased his share count over the year (note 33 in report).  He rejected the proposed sale of the company to TPG the prior year.

 

Has anyone else looked at this by chance?  Reading all the articles and the financial report, it all reads like a chapter straight out of  Greenblatt's - you can be a stock market genius book, missing only a John Malone appearance.  The Altamont deal looks extremely generous on their behalf; if anything I'd love to be on their side of the trade. 

[booth52]

This didn't drum up too much interest before.  Will post this anyways in case anyone finds it compelling.

 

Shares have fallen 11% to A$0.42/share today.... on the news that the company chose the more shareholder friendly refinancing deal offered by the Centerbridge/Oaktree Capital  C/O consortium, as opposed to the previous deal with the Altamont consortium.

 

New agreement has in hand an alternate new CEO from Eddie Bauer as opposed to Scott Olivet from Oakley/Nike.  I'm sure one's a better pick for the company, but I wouldn't know which one, if any.

 

http://www.shop-eat-surf.com/2013/09/billabong-picks-centerbridge-oaktree-olivet-will-not-become-ceo/

 

In the new C/O deal:

Existing shares: 478.9M at $0.42/share

Rights issue to existing shareholders: 178.6M at $0.28/share  (Average price of  $0.38/share exercising rights)

C/O placements: 329.3M @ $0.41/share = $135M

C/O options (7 year options): 29.6M @ $0.50/share

Altamont options (7 yr options): 42.3M @ $0.50/share

Fully diluted: 880.1M shares

 

My intrigue again is simply following value based Oakmark/Howard Marks & co into this, and assuming they're looking at this purchase as a potential 50cent dollar:

Oakmark C/O consortium is issuing:

A$386M/debt at 11.9% interest

and taking a 33.9% equity stake (post options/placement dilution) at a purchase price of $0.41/share + options

Bankruptcy/equity wipeout is a risk with Billabong, future earnings difficult to guess at with any confidence.  The ick factor is there. It'd probably be best just to throw on the too risky/too hard pile.  Yet the Oakmark consortium interests seem shareholder aligned.

If my math is right, existing shareholders can buy at 0.38/share (exercising rights), what C/O consortium is purchasing at 0.41/share.

 

Fully diluted, get an EV of about A$421M.  Taking their 2013 EBITDAI (a huuuge leap of faith here) of $72.6M as possibly regular going forward EBITDA gets a 5.8 multiple.  Again, closest comparable being Quiksilver in this industry at an 8.3 multiple awhile back.

 

FYI, to say I'm a novice investor/analyst would be an understatement, so don't take anything I hypothesize with any conviction.  I'm simply at this point a lurker in this great forum for the past couple of years and a newbie value investor.  Having said that if anyone here takes a further glance at this company and sees something appealing, or equally useful something to immediately toss it aside as potential investment, I'd love to hear your feedback.

 

Question:

Regarding OTC stocks/ADR's of foreign securities:  Do rights offerings/warrants/etc. in the foreign stock automatically translate/distribute/get offered to the OTC stocks?  Is there a way beyond contacting the company to determine this?

 

 

Official press releases here:

http://www.billabongbiz.com/phoenix.zhtml?c=154279&p=irol-irhome

 

BILLABONG ANNOUNCES RECAPITALISATION WITH CENTERBRIDGE/OAKTREE CONSORTIUM

MANAGEMENT AND BOARD CHANGES

 

GOLD COAST, 19 September, 2013: Billabong International Limited (“Billabong” or the “Company”) announces that it has entered into binding agreements with certain entities affiliated with Centerbridge Partners, L.P. and Oaktree Capital Management, L.P. (together the “C/O Consortium”) in relation to a long term financing to recapitalise the Company and provide Billabong with a stronger balance sheet and capital structure to allow it to stabilise the business, address its cost structure, and pursue a strategy to grow the business.

 

The agreements will enable Billabong to repay in full its existing US$294 million (A$315 million) bridge loan facility from the Altamont Consortium1 which was entered into on 16 July 2013. The agreements include:

 

  -  a 6 year senior secured term loan of US$360 million (A$386 million) (“New Term Debt”);

  -  a A$135 million equity placement to the C/O Consortium (the “Placement”) and, following the Placement, a A$50 million non-underwritten, renounceable rights issue available only to shareholders other than the C/O Consortium (the “Rights Issue”, and together with the Placement, the “Equity Raising”), the proceeds of which will be used to repay2 up to US$172 million (A$185 million) of the New Term Debt with no prepayment premium; and

  -  29.6 million options issued to the C/O Consortium exercisable at A$0.50 per share. In addition to this financing, Billabong retains the previously announced commitment from GE Capital to provide an asset-based multi-currency revolving credit facility of up to US$140 million (A$150 million) (“Revolving Facility”). In order to adequately reflect the C/O Consortium’s significant investment in the Company, the C/O Consortium will be permitted to nominate representatives to the Board of Billabong. The Company notes that both members of the Consortium have long track records of successfully investing in and partnering with retail and other businesses in achieving operational turnarounds.

 

 

Some more:

http://www.jeffharbaugh.com/2013/09/20/billabongs-deal-i-didnt-see-this-one-coming/

 

 

[Hielko]

Regarding OTC stocks/ADR's of foreign securities:  Do rights offerings/warrants/etc. in the foreign stock automatically translate/distribute/get offered to the OTC stocks?

I think that most often the rights are sold and you will get the proceeds as a dividend.

[Packer16]

Thanks for highlighting this as Oaktree is always an interesting investor.  One thought is that since Oaktree owns the debt also if things don't work out as expected this could be a "creeping" control play for Oaktree.  Also, isn't the EV closer to $634 ($200 debt plus $434 equity (987 m * $0.44)?  This would imply an EV/EBITDA of closer to 8.7.

 

Packer

[booth52]

Hielko,

Thanks.  I sent an email to Billabong requesting verification of this.  If that is the default, OTC stockholders automatically getting proceeds, it seems otc shareholder friendly.  I would've thought it would default to a non-action by the otc shareholder ending up in no rights/proceeds received.

 

Packer,

Thanks for the response as well.  I don't quite follow the "creeping" control play concept.  If you could clarify to me, I'd very much appreciate it.  My thought was if they were purely debtors, bankruptcy wouldn't be completely undesirable to them potentially, wiping away equity etc.  But they're purchasing all that common stock and taking those 7 yr options as well, which would potentially be wiped if so.  Perhaps purchasing equity was a requirement to get the deal instead of Altamont. Regardless of the cause, the effect is what it is.

 

I did some preliminary searching for similar retail companies refinanced, debt heavy, and (I can't remember the store names) and several of these did go through bankruptcy again, leading me to think, that bankruptcy, was still a likely possibility. 

interest expense of 11.2% on the $386M debt is $45.9M

Add some more for the revolving GE credit of some $5M +/0 (I think this is a conservative number: base credit + 2% margin)

interest expense = $51M/year +/-

I guess it all depends what the operating income is likely to be over the next 5 years or so.  Is that $72.6M EBITDAI anywhere close to being realistic bottom by chance?  If so, this might be a good purchase.  Is the drop in earnings going to continue?  They've lost the Dakine and Nixon brands, which were supposedly two of their more profitable brands.  They're selling their West 49 stores in canada (name may be wrong).  Slashing expenses, but revenue should follow too at the beginning, possibly. I don't know what the future CEO's direction will cost capital expense wise.  He may burn through cash.  Their revenues aren't easily split out by brands/components to extrapolate.

 

Regarding EV: This was my calculation:

I subtracted out cash and cash equivalents, as well as assumed the rights and options are exercised and subtracted those cash proceeds out from equity + debt.

It's possible I may be accounting for amounts twice.

My initial calc was wrong, using 880.1M shares outstanding, instead of 1058.6M shares outstanding (assuming everything excercised, see below) You have 987M shares; not sure where the discrepancy; again is quite likely an error on my part.

 

 

$A444.6M = 1058.6M fully diluted shares (per release, pg 7) x 0.42/share

$A386M  = Debt

-$A334.8M = cash and equivalents (fully diluted, options & rights exercised)

$A495.8M = EV

 

$EV/EBITDAI = 495.8/72.6 = 6.8

 

$80.9M = cash

$32.9M = short term investments

$50M = rights issue $0.28/share*178.57M

$14.8M = C/O options exercised at $0.50share x 29.6M

$42.3M = Altamont options excercised at $0.50/share x 42.3M

$135M = C/O placements at $0.41/share

$334.8 = total cash and cash equivalents

 

Thanks again for your responses Packer16 & Hielko.

 

Additionally,

I believe it's the guess the parsad stock thread that mentioned  ARO (aeropostale);  a response there highlighted a Ms. greenblatt primer on retail  (attached) which talked about jumping into retail stocks on depressed stock evaluation tying into temporary fashion/trend/revenue blips on the long term radar.  I am not sure if Billabong matches this blueprint, but if it does, it could be compelling.  Coincidentally, Billabong led me to researching ARO, but I missed buying on it prior the 20% rise this week.  May still purchase ARO, but still thinking on it.

 

Linda-Greenblatt-Presentation-on-investing-in-retail-stocks.docx

[booth52]

Sorry, one other thing on the interest expense of $45.9m/yr on the $386M debt.

Annexure A on their documents states their is no prepayment premium on A$185M of new debt if paid from proceeds of the rights issue or placement issue ($50M+135M= $185m)  yearly interest expense could be slashed, by 11.9% x 185m =$22m/yr immediately potentially, if management so desired.

[Packer16]

By creeping I mean Oaktree owns the fulcrum security so if there is a further deterioration of the business they can take over the business via bankruptcy (due to owning the HY debt).  They also get a good yield - 11.9% on a not very levered business.  The coverage (EBITDA/Int exp) is greater than 3x implying a rating of B+/BB plus an equity kicker. 

 

The only small adjustment I would make to your EV calc is to not include the $0.50 strike price securities' cash proceeds until the stock price is greater than $0.50 or there shares in diluted share count.  This would increase the EV to $521 m and an EV/EBITDA of 6.6x.  At this value and given the levered nature of the business, the current upside to lets say a 8.5x EBITDA multiple is about 20%, a $570m equity value/$474m currently.  So to get more than this BBG's performance has to improve and I am not convinced this will happen.

 

Packer

[booth52]

Thanks for that explanation Packer, and your opinion on this stock as well.    The willingness of you and all the other great investors here to share their thought process and ideas is truly appreciated.