Speaking of Consolidation- Boardriders’ Acquisition of Billabong

Back in September of 2013, when Centerbridge and Oaktree invested in Billabong, there was some discussion/consternation about the possibility of Oaktree combining Quiksilver, which it already controlled with Billabong.  Quiksilver’s name, as you know, was changed to Boardriders.  It owns the Quiksilver, Roxy and DC brands.  Billabong’s three largest brands are Billabong, RVCA, and Element.  It also owns some smaller brands which I continue to expect will be sold.  Probably easier to do that once Billabong is not a public company.

You may remember that Gordon Merchant, Billabong’s founder, turned down AU$3.30 a share for Billabong back in 2012 after its troubles had started.  Now, he’s taking AU$1.00 a share.

There doesn’t seem to be much doubt that the deal will close.  The press release tells us that Oaktree controls 19% of the shares, Centerbridge 19.2% and Gordon Merchant 12.8%.  That’s 51%.  And, as the release notes, “The Scheme is subject to limited conditions and is not subject to financing or due diligence.”  Pretty clearly all parties know everything there is to know about the involved companies.

Why didn’t it happen sooner?  Things were more hopeful back in 2013 when Neil Fiske became CEO of Billabong.  A rescue/merger wasn’t supposed to be necessary.  But a tougher than anticipated market, a longer than planned time line for implementing the strategy Neil proposed and, ultimately, issues with cash flow made the merger more attractive- as in there wasn’t much of a choice.

Back in September, when I reviewed Billabong’s results for the year I said, “We’re left with two important things to think about.  First, how is Billabong doing in building brands that can grow revenues outside core markets?  I think they are making some progress, but have no way to quantify that.  Second, the debt repayment and option expiration schedules suggest there will be some additional pressure in the next couple of years to improve the bottom line results.”

I have been a continuing fan of Neil’s strategy, but he ran out or time.  The cash flow issues became unmanageable in normal operating mode.  “Between two and five years from now, Billabong has AU$259 in fixed rate debt maturing,” I noted.  North of AU$200 million of that was due within two years.  Billabong was already paying some of its interest by issuing more debt.

The other thing I’d note is that Gordon Merchant had to agree to the deal.  That had to be hard for him. It wasn’t going to happen until it was clear to everybody there was no choice.  Assuming the fundamental market position of Billabong and its brands hasn’t gotten worse in the last couple of years (which I believe), Oaktree/Centerbridge got a way better deal than they could have negotiated a couple of years ago.

It’s interesting to read the press release and see the Billabong directors recommending the deal because of it’s “attractive premium and “attractive acquisition multiple.”  I see this deal as being about resolving Billabong’s debt and cash flow issues.

Billabong Chairman Ian Pollard said, “…the Board considers that it will become necessary for Billabong to materially reduce debt if it is to continue with its current strategy which, given the Company’s existing high debt levels is expected to require asset sales or a dilutive equity raising. Having regard to these factors, and the fact that shareholders are being offered an attractive premium for their shares, the Board believes this offer is in the best interests of shareholders.”

Almost more interesting to me is what happens after the deal closes.  Oaktree Managing Director Dave Tanner is going to be the CEO of Boardriders.  Pierre Agnes, current Boardriders CEO, will be President and have a seat on the board.  Neil Fiske’s role hasn’t been explained yet.

But below that lofty level, there lots of questions.  How/will the Quiksilver and Billabong brands still be competing?  How many retail stores will be where carrying which brands and located where?  Will they be in different distribution channels?  Can we expect the sale of any brands?

Obviously, Oaktree will be looking for some synergies in their accounting, supply chain, locations, and marketing departments.  How do you save the associated costs while keeping the brands distinctive?  Will there be one design group? Can we expect some job losses?

There’s a lot to think about.  Honestly, the deal and getting it done seems like the least interesting part.  How do these two companies look operationally once consolidated and what will be the role and market position of each brand?  There will be things that can be done differently once Billabong is no longer public, and I hope we get an occasional glimpse into those changes.