BBG - Billabong International

[McLovin]

Latest EBITDA guidance = $74-$85m in constant currency terms, so say $80m. BTW the guidance went from $130m in Sept to $85-92m in Dec then $74-85m in Mar, so based on this trajectory it'd be ~$60m come June.

Take $80m EBITDA and trading at 6x gives EV of $480m.

Debt was $152m, deferred consideration $55m, so equity value ~$273m. With 480m shares on issue that's 57c per share. By the time EBITDA falls to $60m, the same calculation yields 32c per share.

So below 50c is a pretty real possibility and may not turn around until there are concrete signs of EBITDA turnaround.

I've seen a few broker reports floating around with valuations of 30c. That seems a bit overdone to me. My forecast is that we are at or very close to the bottom of the cycle for BBG. If I'm wrong then my 50c valuation looks optimistic. I also think the mid life crisis the main brand is going through is salvagable. Then again, I saw my 60 year old uncle wearing a pair BBG boardies the other day.

 

[YMI]

Thanks guys for explaining that. Because the outlook of the company doesn’t seem too rosy, I think I won’t bet real money on it. I’ll buy some virtual shares for my ASX game and hope it’ll improve my rank from ~9000 to perhaps ~5000

 

[notting]

As soon as stock is in play the fundamentals don't matter until that is all over and it doesn't happen.
Whilst it is in play, I look at the motives of the players.
This one is interesting because you had a guy leave the board to make a bid at a price.
That to me meant he knows what it's worth and thinks he can make a fortune and has to convince backers to help him.
Prior to that I wasn't interested in the previous take over offers, there was no way of reading it.

The brand strength seems to be being validated by the fact that a competing brand has gotten involved. Either way I think they think it is better than their brand, (I new BB before Nth) and want it or at the very least don't want it against them or gives them easy leg into diversified products and styles.

To me the current bid price is serious but the Mexican stand off is delaying the process. The auctioneer is calling for bids and everyone is looking at their shoes. But they are there!

 

[ROE]

this puppy is very sick, they also has lease liability in hundred of millions last time I look around 400m-500m.
they are closing up shop fast and furious because a lot of their brick and mortal shop is losing money...

and because of lease liability there is no way they can restructure and cut cost in a meaningful way...leave shop open you lose money, close shop you face lease liability ....

with 100m plus debt there are not out of the wood yet..they could face capital raising and a whole raft of stuff
if the bankers getting nervous if the take over doesn't eventuate...

2 PE look at the business and walk tell me something is seriously wrong....and now two is looking and they taking a long long time so something isn't right, lot of ??? in the book I reckon and if these 2 walk god know what stuff they carries that scares everyone after they dig deep...

I think it's a punt rather than investment grade ....

 

[notting]

I can't remember a company accepting a takeover bid that is 20% below its last traded price.
Spose you can't expect more from a surf ware company with a Bong in its trade mark.
Wonder if it's a ploy to extract a counter offer out of Nth Face and co.

 

[Ves]

I can't remember a company accepting a takeover bid that is 20% below its last traded price.

I was actually wondering to myself if it is even legal. How can it be to the benefit of shareholders interests? It rings of admission of failure to keep the market reliably informed.

 

[ROE]

I was actually wondering to myself if it is even legal. How can it be to the benefit of shareholders interests? It rings of admission of failure to keep the market reliably informed.

It's legal they have condition attached....called negative premium...it happened in the past on numerous occasions....that what happen when you on back foot and got nothing to offer...

According to AFR Deal logic recently...

Norfolk Group by RCR Tomlinson, at a negative premium to
its pre-bid trading price

Redcape Property Fund and Charter Hall Office
were executed at a negative premium.

In the Asia-Pacific, Dealogic also notes negative
premiums being proposed in bids for control of
companies including Japan’s I Metal Technology
and retailer Daiei Inc.

I reckon their book is very red like Communism Red I reckon it could collapse so they pretty much offer
for all their stocks and asset worth and nothing else...

if this take over failed...I definitely think a capital raising is on the card pretty straight away else bankers will step in...either way 60c look good else you looking at sub 30c stock or less if they announce capital raising...

but who would underwrite this risky stuff? they probably need 40%-50% discount for them to game the risk...

52c the market price for a take over at 60c what do u think happen when the take over collapse easily drop sub 40c
then capital raising....dead nail to holder...massive dilution ....

 

[Uncouth Barbarian]

Methinks the takeover wont happen. I dont understand how once great companies fall apart like this. No one ever seems to fall on their sword and admit ..Gee whiz we got it wrong. Looking through the maze of gibberish in company reports today you spot a few clues but you have to look hard for them. What possessed them to buy out so many brands at outrageous goodwill levels about $700 million then suddenly write off most of that under the bean counting term of impairment. I note one of the brilliant acquisitions for 98 million dollars included a goodwill component of 118 million or thereabouts so that gem was basically 20 million INSOLVENT at the time and I only have secondary schooling to rely on to make my investment decisions.
If the takeover does not happen it will need fresh capital. Firstly, the share price will fall, new capital if people are stupid enough to throw it at BBG will dilute holdings and drop the share price further. The banks could pull the pin.
Closing stores will penalize them millions which they havent got in lease terminations. Creative bean counting has produced one interpretation that shows BBG to be solvent and worth something. If I ran my companies flying by the seat of my pants they would lock me up and throw away the keys. Listed companies seem to have free reign with little or no consequences. My suggestion. It has gone past the point of no return. Sell everything off, properties, stock, pay all your bills, liquidate the company and start again with no massive senior executive pay packets.

 

[VSntchr]

DOWN 50% on a profit downgrade.

Australian bricks and mortar weaker than expected, America slightly better, Europe remaining weak...

OUCH!

Takeover prospects are over and the company now looking for other refinancing deals....


Looks pretty glum, would be a massive loss of brand power if BBG goes down the toilet...

 

[prawn_86]

Does BBG own any of their stores/real estate? Or is it all leased?

 

[McLovin]

I've seen a few broker reports floating around with valuations of 30c. That seems a bit overdone to me. My forecast is that we are at or very close to the bottom of the cycle for BBG. If I'm wrong then my 50c valuation looks optimistic. I also think the mid life crisis the main brand is going through is salvagable. Then again, I saw my 60 year old uncle wearing a pair BBG boardies the other day.

May I recant my earlier remarks.

There's obviously something under the bonnet no one likes. Must be those leases.

I'm amazed that it has gotten to this stage where these guys appear to be on the cliff.

 

[skc]

Latest EBITDA guidance = $74-$85m in constant currency terms, so say $80m. BTW the guidance went from $130m in Sept to $85-92m in Dec then $74-85m in Mar, so based on this trajectory it'd be ~$60m come June

What do you know... 2 trading days into June and we have a downgrade for EBITDA to be $67 to $74m before significant items.

One has to wonder if the brands are not in terminal decline. There were news about key personnels leaving the company (which seems reasonable enough) as no body wants to wait for the restructure if the private equity took them over.

Would someone care to quantify their lease liability? Can you break the lease if there are new tenants to take up your lease (like a simple residential lease here in Australia)?

 

[ROE]

What do you know... 2 trading days into June and we have a downgrade for EBITDA to be $67 to $74m before significant items.

One has to wonder if the brands are not in terminal decline. There were news about key personnels leaving the company (which seems reasonable enough) as no body wants to wait for the restructure if the private equity took them over.

Would someone care to quantify their lease liability? Can you break the lease if there are new tenants to take up your lease (like a simple residential lease here in Australia)?

Their Lease Liability is their dead nail, they cant get out so badly structure, most retails structure so that if their shop is bleeding money they can close shop and walk, I dont know who negotiating deals when they sign up these lease but they are bad deals for BBG...BBG dont have this luxury they are liable for the entire term even if it bleed cash which they do lot and lot of it each month...

AFR has an article sometimes ago about BBG management when in meeting or negotiating deal they want to end meeting early so they can go surfing ....

at this stage it look like a complete wipe out and a re-capitalisation is required....existing shareholder equity will be reduce to next to nothing....

I am surprise people hasnt got out by now at any price..because you end up with nothing soon..I think the banks is now driving BBG ... if they cant recapitalise and get their cash back ....Corporate Grave Yard seem close to certain

 

[Tyler Durden]

Given the news today, can't see why anyone would want to buy them. If large corporations have done highly paid for and professional due diligence to come to the conclusion that this ain't worth buying, then why would the average Joe think he could do any better.

 

[Huskar]

Their Lease Liability is their dead nail, they cant get out so badly structure, most retails structure so that if their shop is bleeding money they can close shop and walk, I dont know who negotiating deals when they sign up these lease but they are bad deals for BBG...BBG dont have this luxury they are liable for the entire term even if it bleed cash which they do lot and lot of it each month...

AFR has an article sometimes ago about BBG management when in meeting or negotiating deal they want to end meeting early so they can go surfing ....

at this stage it look like a complete wipe out and a re-capitalisation is required....existing shareholder equity will be reduce to next to nothing....

I am surprise people hasnt got out by now at any price..because you end up with nothing soon..I think the banks is now driving BBG ... if they cant recapitalise and get their cash back ....Corporate Grave Yard seem close to certain

Banks are in control for sure - the HY13 report says as much.

Note 9 details that because of the ~$500m impairment charge BBG would have been in breach of its debt covenants. The banks only agreed to amend the covenant on the condition that 80% of total assets are provided as security (although I am not quite sure why all the assets aren't pledged as security...) and 85% of EBITDAI.

So even if BBG does in fact make ~$70m EBITDA, 85% or ~$60m will go straight to the lenders.

$10m left for shareholders and $110m market cap = 11x EBITDA which still looks not cheap. Very back of the envelope stuff but shows that current valuation probably fair.

What I wonder is what price would make this a good investment? Is it just the debt levels and lease liabilities?

I reckon revenue growth can cover all these sins and more but really can anyone see that round the corner?...

 

[Uncouth Barbarian]

Banks are in control for sure - the HY13 report says as much.

Note 9 details that because of the ~$500m impairment charge BBG would have been in breach of its debt covenants. The banks only agreed to amend the covenant on the condition that 80% of total assets are provided as security (although I am not quite sure why all the assets aren't pledged as security...) and 85% of EBITDAI.

So even if BBG does in fact make ~$70m EBITDA, 85% or ~$60m will go straight to the lenders.

$10m left for shareholders and $110m market cap = 11x EBITDA which still looks not cheap. Very back of the envelope stuff but shows that current valuation probably fair.

What I wonder is what price would make this a good investment? Is it just the debt levels and lease liabilities?

I reckon revenue growth can cover all these sins and more but really can anyone see that round the corner?...

My best guesstimate is the group is worth just under 10 cents a share around $45 million.
That is based upon more than half the retail shops being unprofitable, BB selling costs are twice and up to three times average selling costs of competitors (very high lease costs, no exit strategy from landlords, high staff levels, far too much dead stock not turning quickly enough, far too much product available)
6000 staff spread round the world sales a paltry $1 billion from 600 retail outlets and 11000 retail doors but still better sales ratio to Quicksilver with 45000 retail doors and $2 billion sales.
The group is still salvageable but it needs drastic action NOW to clear bank and other debts around $350 million.
Lease liabilities $400 million ($60 million termination costs which they dont have)
The basic stable of brands is worth very little but they need to sell off everything non core for what they can get and that could be up to $200 million if the analysts have got it right, still a lot less than the $750 million they spent on their expansion madness.
What should be left is a $50 million group with 50 retail outlets, 250 staff, 1 billion in sales with NO DEBT.
It should be able to generate sufficient profits to pay a 10% dividend $5 million which equates to earnings of $10 million $0.01 one cent profit in the dollar on sales and pay out half as dividend.
The company needs to be recapitalised and slowly claw its way back allowing the share price to pick up as profits grow. IT IS A LONG TERM INVESTMENT....If the banks hold off it could be the turnaround rescue of the century.
Will punters hold out that long. You dont actually lose until you sell but will shareholders be given the chance to see this company turnaround. It is too hard for me to call.
That would be my strategy if I were running the show.

 

[skc]

BBG announced that those looking to recapitalise the company are still looking.

Share price up 46%! WTF?

The recapitalisation, if go ahead, will probably wipe out existing equity holders.

May be it was the shorts looking to cover and realise their profits before the long re-cap process...

 

[Huskar]

BBG announced that those looking to recapitalise the company are still looking.

Share price up 46%! WTF?

The recapitalisation, if go ahead, will probably wipe out existing equity holders.

May be it was the shorts looking to cover and realise their profits before the long re-cap process...

Crazy price action. But looks like opening up again today as well.

Business spectator also reported that some of BBG's debt holders sold out at 20% below par which shows those in the know aren't comfortable with Billabong's future.

It's looking like being the next Nine - and in that scenario the equity holders did get wiped out completely.

But the major difference with Billabong is their debt load really isn't that large compared to cash flow. Net finance costs were only ~$7m in HY13 so covered ~3.5x by reported EBITDA of $24.7m.

Still there are many off-sheet liabilities not covered in this equation: Nixon's US$175m debt (of which BBG has 48.5%) and the lease liabilities.

 

[Huskar]

Short but very informative article in AFR today about their debt: http://www.afr.com/p/business/companies/hsbc_sells_billabong_debt_at_pc_gasawz3KNLPsHkvkh0yKqM.

7 bank syndicate and HSBC has sold out 20% below par.

AFR reports $400m of gross debt expiring July 2014, $400m of off-balance sheet lease commitments and $50m of earn-outs.

 

[McLovin]

CBA sold it's debt at 85c/$1 last night.

Given the lease liabilities + outstanding debt, the equity must be worth zero or close to it. If you can buy the debt at 80c you could probably end up owning something that will be worth a bit more in a few years.