Aug 27, 2012
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Australia's Billabong aims to turn tide as profit slides

Aug 27, 2012

Australian surfwear company Billabong International launched a turnaround strategy on Monday to fend off a A$694 million ($723 million) private equity bid, even as it posted a collapse in second-half profit.

Photo: Billabong

Billabong, which has opened its books to second-time suitor TPG Capital, outlined a four-year plan to simplify its business and revive sales, although it conceded investors would have to wait two years for the biggest benefits to flow through.

The debt-laden surfwear chain, which says the latest bid from TPG is too low, has been hurt by an ill-timed global expansion and the global economic downturn, while its brands have lost some of their appeal with young shoppers.

"Whether the plan is enough to stave off TPG, I have my doubts. My concern now is that TPG walks away," said Beulah Capital portfolio manager Tom Elliott.

"If you want a bid to go ahead, you make it happen. If you don't, you obfuscate and stall and produce alternative plans, as they are doing," Elliott said.

Shares in the group, which have fallen 75 percent over the past 18 months, initially dipped 2.2 percent on Monday before recovering to be up 0.4 percent at A$1.35.

Second-half profit before one-off restructuring and other charges dived to A$2.4 million from A$62 million a year ago, based on Reuters calculations, below analyst forecasts of A$12.3 million.

Including charges, Billabong posted a full-year net loss, its first since listing in 2001, of A$275.6 million down from a profit of A$119.1 million.

TPG made its latest takeover bid for Billabong in July, just five months after an earlier, higher offer was knocked back.


Billabong, with brands including its namesake brand, Von Zipper and Element, dumped its chief executive in May after several profit downgrades, and appointed Launa Inman who previously headed the discount chain Target, owned by Wesfarmers.

Unveiling the four-year plan, Inman told analysts Billabong will focus on core brands, cut styles by 15 percent, and improve the supply chain for its retail and wholesale operations.

"I am very confident we will be able to execute the strategy," Chief Executive Inman said.

Inman said Billabong could capture a larger share of global board sports retail sales, which she said totalled A$8.2 billion in the U.S. market and A$4.1 billion in the rest of the world.

Billabong's U.S. revenues of A$750 million in the latest year accounted for about half of total sales. Its competitors include Quiksilver Inc, PacSun and Zumiez Inc.

Inman told reporters that that discussions with TPG were continuing and due diligence had begun. TPG has built up a 12.45 percent stake after winning over two institutional shareholders.

In the full-year results, one-off charges totalled A$336.1 million, including the closure of undeperforming stores and impairment charges.

Billabong said trading conditions in Europe were soft with full-year sales down 17.6 percent; in North America below expectations with sales down 11 percent; and in Australia consumers continued to be very cautious though sales rose 4.1 percent. Total revenues fell 7.9 percent.

For the current year, Billabong forecast earnings before interest, tax, depreciation and amortisation (EBITDA) would rise to between A$100 million and A$110 million, from A$84 million.

U.S.-based TPG offered A$1.45 per share for Billabong on July 24, and said it could raise or lower its price after it has seen Billabong's books.

Analysts at Citi said last week they saw a 50 percent chance that the offer price would be raised to A$1.60 after the due diligence was completed, for a value of A$766 million.

But that would still be well below TPG's last approach, which was worth some A$841 million.

If the deal were to succeed, it would be the second privatisation in Australia this year after the country's largest buyout firm Pacific Equity Partners bought business services firm Spotless in April for A$720 million.

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