Before announcing its interim results today, Billabong (BBG) requested a trading halt, which brought about speculation that private equity was circling to pick up the troubled retailer.
News this morning verified the rumours, with TPG Capital making a takeover bid of $765 million, or $3 per share. The price jumped some 60% after the trading halt, but still below the takeover price.
The board stated that TPG’s bid was non-binding and subject to finance and due diligence and would provide with a broad restructuring initiative, including a majority sale of its Nixon youth accessories brand to private equity group Trilantic Capital Partners, closing 150 stores and cutting 400 staff globally, a new dividend reinvestment program as well as cutting the dividend payout ratio to 25 per cent.
Deutsche Bank ran the ruler over the bid, and remains unchanged with its Sell view and 12 month price target of $1.80 per share:
Significant earnings collapse in recent years – Billabong last reported earnings growth in FY08 and we expect FY12E EBIT to be ~56% below the peak achieved in that year. While there have been a whole host of factors that have driven the earnings decline over the last few years, the group has acquired a number of brands and retail operations over the period and is a significantly larger (although less profitable) business than it was then.
If an acquirer believes that the issues plaguing the industry are cyclical and not structural, there may be potential for a significant improvement in earnings when conditions normalise.
Therein lies the punch, because beyond the debt levels (which will be curtailed somewhat by the Nixon sale and reduced dividends, the earnings forecasts are not pretty even cyclically:
Beyond the structural/cyclical retail spending argument, Deutsche Bank calculates a “mere” return of 11% for TPG based on current financials and internal rates of return.