Is Billabong's Dump, Quicksilver's Pump?

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In Murdoch's Dump is Disney's Pump, I spoke about the wisdom of the Murdoch and Lowy families joining with others (via their respective mega-mergers) to combat business/industry disruption.

Just to refresh - Murdoch/Fox shareholders get stock roughly equivalent to ~25% of a post-deal Disney, and keep the Fox broadcasting and TV station assets which will be repackaged in a separate listed entity. Disney takes majority control of Hulu courtesy of the added Fox stake, and Fox shareholders remain in the game in a more strategic and meaningful way and with a tsunami of exclusive content to counter Netflix, Amazon and others.

Under the proposed Westfield/Unibail-Rodamco deal, Westfield shareholders get cash and shares and continue the journey with a significantly stronger and fortified balance sheet and with trans-hemispheric diversification.

Summary? Step-change, impactful and highly strategic.

I also mentioned I thought there would be many others that would miss their Ark. These will become apparent in due course.

But one group that is seeking to catch someone else's Ark, just long enough to grab a partial refund is ASX listed Billabong.

This latest dump, albeit less than 0.5% of the dollar value of the other two (A$380 million for Billabong vs. a combined ~A$100 billion for the Fox assets and Westfield), concerns the proposed sale of Billabong to Boardriders Inc., the parent of its key US-based competitor brand, Quicksilver.

Private Equity group Oaktree Capital Management (Oaktree) controls Boardriders and already holds 19% of Billabong, and along with distressed investor Centrebridge is owed in excess of A$170 million by Billabong, following its 2013 rescue deal.

The deal announced today concerns a recommended cash scheme of arrangement, which if and once complete will create a ~$2 billion revenue retailer of surf/skate products and active-wear. This 'house of brands' platform would feature the Billabong, RVCA, Element, Xcel, Quicksilver, Roxy and DC Shoes brands, amongst others. Sweet.

Still, on top of slugging it out, these competitors have had to try and combat: (a) a plethora of surf-wear competitors (a quick look at Ranker.com indicates at least 94 top brands); (b) the rise of other leisure, sport, tribal street and active wear brands which have eroded surf-wear share; and (c) cannibalisation of their mall-based retail outlets by online shops.

The contrasting aspect of this deal is that it is a 'dump' in the pure sense because Boardriders will pay in cash, not in shares. This is because Boardriders shares are not quoted on an exchange and in private equity funded public-to-private situations, cash is the usual currency.

However, the biggest motivation for the deal is that the alternative of staying independent would not be as attractive as cashing out now with certainty - aka, an uncertain A$170 million debt refinance of the Oaktree/Centrebridge debt, most likely ending with massive equity dilution.

So it is not too difficult to imagine the likely shape and force of the Oaktree dumper that the other Billabong shareholders would dodge by cashing in their tickets now.

Equally, combining ownership and balance sheets would be far easier for Oaktree to manage.

But the post-deal prospects for Boardriders are not totally clear. Combined revenue of $2 billion is still small by global retail standards (Nike alone had FY17 revenues of US$34 billion) and over 680 retail outlets is probably even more risky than having less.

The question therefore becomes whether this deal provides any competitive edge and how this deal sustainably fortifies Oaktree's investment, other than for combining brands with some rationalisation/de-duplication benefits. 

While Billabong shareholders may get to swap their surfboards for deckchairs and Coronas, will this combination be enough to pump the perfect wave for Boardriders, at least until Oaktree can find a way out?

And then what?

Mike


NextLevelCorporate delivers independent and transformative corporate finance solutions to clients looking to reshape their competitive landscapes, in and out of Australia. Our ability to do this comes from ~30 years of sector-specific proprietary intelligence, cross-border relationships and the freedom to independently originate and advise on customised Mergers & Acquisitions, Growth Capital and Special Situations solutions.