SYDNEY — Billabong International Ltd. has granted due diligence to a consortium led by its executive director and president of the Americas operations, Paul Naudé — and the market is divided as to its prospects.
Shortly after the Gold Coast, Queensland-based surfwear manufacturer announced that Naudé, private-equity group Sycamore Partners Management and Bank of America Merrill Lynch had made a 1.10 Australian dollar a share offer, or $1.14 a share offer, or $1.14 a share at current exchange, valuing the company at just less than 527 million Australian dollars, or $546 million — Billabong stated that it had reviewed the proposal in detail and that due diligence is expected to take up to six weeks.
“The board of Billabong reiterates that there is no guarantee that, following a period of due diligence by the consortium, an acceptable, binding proposal will be forthcoming,” said the statement to the Australian Securities Exchange. Unlike other ASX statements regarding the year’s previous Billabong offers, however, no mention was made of the 1.10 Australian dollar proposal undervaluing the company in a change-of-control context, a point that numerous analysts believe could be significant.
The Naudé-Sycamore proposal is the fifth takeover offer received by Billabong in 2012, after TPG Capital’s earlier bids of 3.00, 3.30 and 1.45 Australian dollars (or $3.12, $3.43 and $1.51), with the latter matched in September by Bain Capital. Both TPG Capital and Bain Capital later withdrew their offers after commencing due diligence, citing undisclosed “issues” with the company’s books.
As 2012 ended, Billabong’s stock was trading at 86 Australian cents, or 89 cents — well below the 1.10 offer.
In a Dec. 19 ASX statement covering the Naudé-Sycamore bid, Billabong announced its third profit downgrade in twelve months, prompting both Citibank and UBS to downgrade Billabong’s stock to neutral from buy and J.P. Morgan to cut the stock to underweight from neutral.
“It’s not encouraging at all,” said IG Markets analyst Stan Shamu. “Investors lose confidence quite quickly in this environment. Management knocked back a few takeover bids at higher prices, now they’re scrambling for 1.10. If this takeover doesn’t get through, I think it could get materially worse, just looking at some of the recent comments by brokers following the profit warning. It seems the stock would be trading at a much lower price if it wasn’t for the takeover offer underpinning the price.”
Deutsche Bank has predicted a 45 percent probability that a 1.10 deal will be successful. One Sydney broker, who declined to be named, put the odds at 50-50.
“Given the share price, the market is not proposing a huge probability of it going ahead,” said the broker. “But if Naudé and his syndicate actually come up with a firm bid, I personally think that the board will have to accept it, even though they knocked bids back from two private-equity companies before, and if you said no at 1.40 [$1.45], they’re going to look like absolute clowns. I think they’ve almost been put in a corner here. They haven’t said straight out it’s undervalued, and given that Naudé is heading up the bid, when you talk about due diligence, it’s hard to imagine he’s going to find something he doesn’t know. Having Naudé there is, I think, encouraging, because nobody knows the company like he does. He’s been there long enough. It’s going to take a long time to turn this business around. But I think the guys taking it over will make a lot of money.”
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