Billabong International BBG
March 26, 2013 - 7:37pm EST by
agape1095
2013 2014
Price: 0.73 EPS $0.00 $0.00
Shares Out. (in M): 479 P/E 0.0x 0.0x
Market Cap (in $M): 350 P/FCF 0.0x 0.0x
Net Debt (in $M): 200 EBIT 0 0
TEV ($): 549 TEV/EBIT 0.0x 0.0x

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  • Fashion
  • LBO
  • Australia
 

Description

 

Thesis

 

Current price represents an amazing opportunity to own a cyclical business with strong brands with a short term catalyst that can unlock value (two groups bidding $1.10/share).  Even if the LBO fell through, Billabong as a going concern should provide significant upside to equity holders.

 

Market Perception

 

  • The business is in structural/secular decline.
  • There are hidden problems as two buyout firms (Bain and TPG) withdrew their bids last year after due diligence.
  • VF Corp/Altamont and Sycamore may withdraw their $1.10/share offer this week after due diligence.

 

Variant View

 

  • The portfolio of brands, especially the namesake Billabong brand still has significant brand equity left.
  • Surf/Skate apparel is currently out of favor, but it will come back.
  • Private equity unlikely to withdraw their bids this time.  $1.10 is a really good price.

 

Why would the buyout offers stick this time?

 

  1. 1.       On 3/21/2013, the stock dropped to as low as $0.63 after ending the previous day at $0.81 due to speculation that the offers will be withdrawn.  Trading was suspended early.  Billabong issued a regulatory filing that states clearly both bids are still ongoing.  It’s highly unlikely Billabong will issue such statement without verifying with the bidders or that they will lie to the company.
  2. 2.       The best way to make money in private equity is to buy at distressed price (more on this later).  The broken auction of last year has provided a rare opportunity and both groups know this.
  3. 3.       Paul Naude, who partners with Sycamore, is the head of Americas and has worked at the company for over a decade.  His interest in the company is purely financial as he has no reputational/ego issues with the Billabong name.  He is an insider who knows the math.  Due diligence will not scare his group away.
  4. 4.       Billabong would fit nicely if acquired by VFC, who has the same business model.  VFC can realize huge synergies and improve operational efficiency.  Most importantly, VFC knows how to run brands.  Base case for VFC is the acquisition should bring in at least $190mm EBITDA annually (LTM Billabong revenue x VFC long term EBITDA margin = $1.29B x 14.7%).  Again, this offer is very attractive to VFC.

 

The Math

 

Billabong has $86.6mm cash, 479mm shares outstanding, and $286.3mm of debt.  Current EV = 0.73 * 479 +286.3- 86.6 = $549.4mm.  Buyout EV = $726.6mm.

 

Historically, from FY 2001 – 2012, EBITDA margin has averaged 17.3%.  Before the business turn south in the last two years, EBITDA margin averaged 20.6%.  Assuming the new owners can stabilize sales and restore margins, Billabong is a $223mm to $266mm EBITDA business.

 

Scenario 1, Buyout bids are real

 

I do not have any insider knowledge about the buyout offers.

 

I believe, the private equity guys are assuming $190 – 240mm of EBITDA in the transaction which implies buying out Billabong at an EV/EBITDA multiple of 3.8x based on $190mm.  This is ridiculously favorable for the buyers. 

 

If both parties make final offers, I can see a bidding war.  VFC can be more aggressive as they can partly fund the transaction with stock trading at 17x P/E.  Upside in a bidding auction scenario could top out at 6x EBITDA, implying EV of $1.14B (6 *$190mm) and $1.96/share.

 

Scenario 2, Both buyers withdraw

 

In this case, the key question is the intrinsic value of the business.  The new management team is already closing stores, cutting costs, eliminating weaker brands and refocusing on stronger brands.

 

A conservative base case of $1.2B sales, 12% EBITDA margins and 6x EV/EBITDA suggests the stock should be worth $1.39.  For reference, average retailers trade at 6 – 8x EBITDA; strong ones trade at 11 – 16x.

 

Can the business be turnaround?

 

I don’t know but I can name a few examples such as Gap, Olay, and Swatch that did.  Unlike Blockbuster, Billabong does not face existential threats.  Unlike Sears, there is still enough brand equity for it to be saved.  The point is with the right strategy, I am a believer because surf wear is just temporarily out of style.

 

Downside Risk

 

The price action on 3/21/2013 provides anecdotal evidence of where the stock will go if there are no offers.  $0.63 seems resonable.

 

BestBuy Analogy

 

Both companies share some similarities:

 

  • Market perception is extremely poor
  • Sales and margins decline
  • New management recently onboard
  • Receive offers to be taken private

 

BestBuy was and is in a worse situation than Billabong 

 

  • BestBuy has a bigger problem: it is fighting against “showrooming” and there is no sign of it winning the battle.
  • Schulze is more than a financial buyer.  He was motivated to protect his legacy.  The buyout price reflected more than objective value
  • The bid failed even with Schulze being the largest equity holder

 

Anyone who purchased BBY stocks in the last 4 months are sitting on some hefty gains.  I believe similar dynamics is at work for BBG.  Current price is depressed and the stock could go up just because of investor sentiment change.

 

 


I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

03/28/2013 is the deadline for the both buyout offers.
 
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    Description

     

    Thesis

     

    Current price represents an amazing opportunity to own a cyclical business with strong brands with a short term catalyst that can unlock value (two groups bidding $1.10/share).  Even if the LBO fell through, Billabong as a going concern should provide significant upside to equity holders.

     

    Market Perception

     

    • The business is in structural/secular decline.
    • There are hidden problems as two buyout firms (Bain and TPG) withdrew their bids last year after due diligence.
    • VF Corp/Altamont and Sycamore may withdraw their $1.10/share offer this week after due diligence.

     

    Variant View

     

    • The portfolio of brands, especially the namesake Billabong brand still has significant brand equity left.
    • Surf/Skate apparel is currently out of favor, but it will come back.
    • Private equity unlikely to withdraw their bids this time.  $1.10 is a really good price.

     

    Why would the buyout offers stick this time?

     

    1. 1.       On 3/21/2013, the stock dropped to as low as $0.63 after ending the previous day at $0.81 due to speculation that the offers will be withdrawn.  Trading was suspended early.  Billabong issued a regulatory filing that states clearly both bids are still ongoing.  It’s highly unlikely Billabong will issue such statement without verifying with the bidders or that they will lie to the company.
    2. 2.       The best way to make money in private equity is to buy at distressed price (more on this later).  The broken auction of last year has provided a rare opportunity and both groups know this.
    3. 3.       Paul Naude, who partners with Sycamore, is the head of Americas and has worked at the company for over a decade.  His interest in the company is purely financial as he has no reputational/ego issues with the Billabong name.  He is an insider who knows the math.  Due diligence will not scare his group away.
    4. 4.       Billabong would fit nicely if acquired by VFC, who has the same business model.  VFC can realize huge synergies and improve operational efficiency.  Most importantly, VFC knows how to run brands.  Base case for VFC is the acquisition should bring in at least $190mm EBITDA annually (LTM Billabong revenue x VFC long term EBITDA margin = $1.29B x 14.7%).  Again, this offer is very attractive to VFC.

     

    The Math

     

    Billabong has $86.6mm cash, 479mm shares outstanding, and $286.3mm of debt.  Current EV = 0.73 * 479 +286.3- 86.6 = $549.4mm.  Buyout EV = $726.6mm.

     

    Historically, from FY 2001 – 2012, EBITDA margin has averaged 17.3%.  Before the business turn south in the last two years, EBITDA margin averaged 20.6%.  Assuming the new owners can stabilize sales and restore margins, Billabong is a $223mm to $266mm EBITDA business.

     

    Scenario 1, Buyout bids are real

     

    I do not have any insider knowledge about the buyout offers.

     

    I believe, the private equity guys are assuming $190 – 240mm of EBITDA in the transaction which implies buying out Billabong at an EV/EBITDA multiple of 3.8x based on $190mm.  This is ridiculously favorable for the buyers. 

     

    If both parties make final offers, I can see a bidding war.  VFC can be more aggressive as they can partly fund the transaction with stock trading at 17x P/E.  Upside in a bidding auction scenario could top out at 6x EBITDA, implying EV of $1.14B (6 *$190mm) and $1.96/share.

     

    Scenario 2, Both buyers withdraw

     

    In this case, the key question is the intrinsic value of the business.  The new management team is already closing stores, cutting costs, eliminating weaker brands and refocusing on stronger brands.

     

    A conservative base case of $1.2B sales, 12% EBITDA margins and 6x EV/EBITDA suggests the stock should be worth $1.39.  For reference, average retailers trade at 6 – 8x EBITDA; strong ones trade at 11 – 16x.

     

    Can the business be turnaround?

     

    I don’t know but I can name a few examples such as Gap, Olay, and Swatch that did.  Unlike Blockbuster, Billabong does not face existential threats.  Unlike Sears, there is still enough brand equity for it to be saved.  The point is with the right strategy, I am a believer because surf wear is just temporarily out of style.

     

    Downside Risk

     

    The price action on 3/21/2013 provides anecdotal evidence of where the stock will go if there are no offers.  $0.63 seems resonable.

     

    BestBuy Analogy

     

    Both companies share some similarities:

     

    • Market perception is extremely poor
    • Sales and margins decline
    • New management recently onboard
    • Receive offers to be taken private

     

    BestBuy was and is in a worse situation than Billabong 

     

    • BestBuy has a bigger problem: it is fighting against “showrooming” and there is no sign of it winning the battle.
    • Schulze is more than a financial buyer.  He was motivated to protect his legacy.  The buyout price reflected more than objective value
    • The bid failed even with Schulze being the largest equity holder

     

    Anyone who purchased BBY stocks in the last 4 months are sitting on some hefty gains.  I believe similar dynamics is at work for BBG.  Current price is depressed and the stock could go up just because of investor sentiment change.

     

     


    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    03/28/2013 is the deadline for the both buyout offers.
     

    Messages


    SubjectBig assumption/underplaying the risks
    Entry03/27/2013 04:33 PM
    Memberbaileyb906
    While I think the return potential here is pretty good, this write up is making a big assumption stating that the surf/skate apparel downtrend will reverse and come back in favor.  That is a big assumption and there is no evidence to that effect.
     
    Also the author has failed to mention that the business has structurally changed since EBITDA margins went down.  The company went on an ill-fated acquisition binge, buying up tons of retailers around the globe right before the sector went into decline.  Retail inherently has a lower EBITDA margin than wholesale, and a lot of these acquisitions were of not great companies.  So you can't just assume margins go back to where they were.  That is not realistic.  
     
    All that said, risk reward here is probably pretty good.
     
    Good idea, but the writeup underplays the risks.

    SubjectRE: Big assumption/underplaying the risks
    Entry03/28/2013 12:24 PM
    Memberagape1095

    Bailey,

    Thanks for your comments.

    I just want to clarify a few things

    My base case do not assume surfing will come back.  I assume management will make sensible decisions and right the ship per se.

    Here is how I came up with the 12% EBITDA margin

    • Uniqlo is running at 16 – 19%; Inditex is in the low 20’s
    • AEO were at low 20’s pre-2009. It’s now at 15 – 16%; ANF had the same margin.  Post 2009, it’s been 10 – 13%.
    • Pre-2009 BBG’s margin was also in the low 20’s.

    Uniqlo and Inditex are top-notch retailers so high mid teens to low 20’s is unrealistic.  I am using AEO/ANF (both retailers) post 2009 margins as comp.  My base case assumes margins WILL NOT GO BACK to where they were.


    SubjectRE: RE: Big assumption/underplaying the risks
    Entry03/28/2013 04:22 PM
    Memberbaileyb906
    I am sorry but you are displaying a poor understanding of the difference between wholesale and retail.  When BBG had margins in the low 20s, the business was dominated by wholesale which has markdown sharing risk but does not have the high fixed cost structure that retail has because of leases.  The company went on an acquisition binge in retail, and now I believe just over 50% of sales is from retail...so comparing BBG now to BBG before this buying binge is apples to oranges.  They bought a whole bunch of retailers that were marginally profitable, subscale in their regions, perhaps locked into unattractive rent structures.  So to compare it to its pre-acquisition self is naive.  And to compare a bunch of crappy retailers to Inditex, perhaps the best run retailer in the entire world, is just silly.  ANF has much higher ASPs, which should lead to higher margins.  Uniqlo dominates its home market, Japan, where I think it gets at least 90% of revenues.  These aren't good comps.  I'm not as current on AEO but historically it was a very well run company but it has run into fashion issues on the girls' side of the business for awhile.  PSUN is a better comp and it hasn't done a positive operating margin since CY2007.  There are tons of crappy retailers who can't get past a high single digit operating margin, even in good times.  More reason to think BBG Retail will perform like those than like the ones you point out.

    SubjectLooks like 60c/share
    Entry04/08/2013 10:33 AM
    Memberbaileyb906
    So much for the 1.10 being a really good price - I guess too good a price

    Subjectwow - 23c
    Entry06/04/2013 12:05 PM
    Memberbaileyb906
    down 68%in 2.5 months, deal died
     
    what a joke - this company turned down 3.30 a year and a half ago...GRPN but worse!
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