Just a few years after being rescued with financial restructuring schemes, Billabong and Quiksilver are preparing to form a big action sports group with multiple brands, taking advantage of a common platform. The proposed acquisition of Billabong International by Quiksilver's holding company, Boardriders, was approved by the Australian company's board last week, giving Billabong an enterprise value of 380 million Australian dollars (€247m-$302m).
Potentially reshaping the embattled action sports industry, the group would form a global player with some of the industry's most iconic brands and total annual sales of about two billion U.S. dollars, generating combined Ebitda of around US$100 million before synergies.
The two parties formally entered a “scheme of arrangement” about five weeks after Boardriders issued a conditional bid for Billabong. The transaction is projected to close before June 30, although it remains subject to conditions including shareholder, court and regulatory approval.
The price of A$1 per share being paid by Boardriders amounts to a 28 percent premium to Billabong's closing stock exchange price of A$78 cents on Nov. 30, the day before the initial approach, and it implies a multiple of 7.4 times pro forma Ebitda for the past financial year. Boardriders has agreed to buy all of Billabong's shares, except for those that are already owned by its own shareholders.
The deal was brought about by Oaktree Capital Management, a U.S.-based private equity fund that was left with a stake of about 85 percent in Boardriders after the former holding company of Quiksilver went through bankruptcy proceedings for its U.S. subsidiary and a financial reorganization in 2015. Quiksilver emerged from these proceedings in early 2016 and pulled out of the stock exchange, changing its name to Boardriders. Oaktree already held a stake of 19 percent in Billabong, following a refinancing agreement conducted in 2013 to rescue the Australian-based group, and it remains one of Billabong's two largest lenders.
The sale to Boardriders is backed by Billabong's two other large shareholders, Centerbridge Partners with 19.2 percent and Gordon Merchant with 12.8 percent. Oaktree's shares will not be acquired by Boardriders under the scheme and the company will not vote at the relevant shareholders' meeting, which is expected to be held in March.
While they have divested many of their former assets, Boardriders and Billabong remain the biggest factors in the global action sports market. Boardriders' brand portfolio includes Quiksilver as well as Roxy, DC Shoes and several other brands. Billabong International includes the Billabong brand along with RVCA, Element, Von Zipper, Xcel and more. Billabong, in particular, sold out several other brands and some important retail interests as part of a turnaround plan launched three years ago.
Upon closing of the transaction, Dave Tanner, manager director at Oaktree and chief turnaround officer at Boardriders, will become chief executive of Boardriders. This function is currently held by Pierre Agnès, a veteran of Quiksilver who will become president of Boardriders. The French executive will remain a board member and lead much of the integration of the two companies. Neil Fiske, chief executive at Billabong since 2015, has been asked to continue his contribution to the group.
Boardriders said that it would preserve the autonomy and creativity of each of the brands in the group, while leveraging its operating platform to support their global growth. The company indicated that the tie-up will create a company with sales to more than 630 retail stores in 28 countries, plus online sales operations in 35 countries, and more than 7,000 wholesale customers in over 110 countries. The group added that the deal would allow for more intense partnerships with customers and suppliers, while enabling extra investments in the brands and the industry.
Speaking with a French newspaper, Les Echos, Agnès pointed to some complementarities between the two groups. Quiksilver and Roxy are active in water sports as well as snow sports, and they are strongly established in Europe, while Billabong remains strongest in Australia. He indicated that Boardriders could leverage its business in countries such as Mexico and Russia, where Billabong has yet to break through. The Frenchman compared the combination with LVMH and Kering, two French groups that run many luxury brands. Along the same lines, Boardriders and Billabong could share resources to invest more in product development, innovation and marketing for their brands.
A key point for Billabong and its shareholders is that the current situation entails uncertainties, not least relating to the retail market, the outcome of the turnaround and the refinancing of its debt. Ian Pollard, the group's chairman, pointed out in a statement that Billabong would have to substantially reduce its debt to continue with its current strategy – and given the group's high debt levels, this would probably require more asset sales or a dilutive equity increase.
Billabong and Quiksilver both started off in Australia but Quiksilver later settled its head office in California. The two companies moved into Europe by setting up operations not far from each other on the Basque coast of France - in Saint-Jean de Luz for Quiksilver and Hossegor for Billabong. They started spreading more rapidly from the second half of the 'nineties but were badly hit by the downturn in the action sports market in the last years. The slump has apparently been accentuated lately by the athleisure trend, and it has been further worsened by the disruption of the American retail market.
Restructuring measures have been paying off at both companies. Boardriders said that is has “dramatically” improved its operational and financial performance since its turnaround started in February 2016. The company rationalized its distribution, adjusted its cost structure, rewired its product development platform and invested in various brand, marketing and online sales initiatives. Boardriders said the turnaround has formed the basis for its takeover of the Billabong brands.
As reported by Les Echos, Oaktree's intervention enabled Boardriders to reduce its debt from about $800 million to $200 million. Agnès told the newspaper that Oaktree's support has been particularly helpful in restructuring the action sports group's U.S. retail network, which was described as the primary source of its losses.
Excluding divested operations and one-off items, Billabong reported adjusted Ebitda of A$51.1 million (€33.2m-$40.6m) for the fiscal year ended in June 2017 on sales of A$974.7 million (€633.8m-$775.4 m). The Australian company said its performance sharply improved in Europe and the U.S., while it remained sluggish in Australia and Asia. Billabong ended the year with a loss of A$77.1 million (€50.1m-$61.3m) due to write-downs relating to its secondary brands.
Billabong said in the context of the acquisition that it expected its adjusted Ebitda to range between A$51.1 million and A$54 million (€35m-$43m) for the current fiscal year, assuming reasonable trading conditions and relatively stable currencies. It said its results during the recent holiday season were generally in line with its forecasts, albeit at their lower end.
Meanwhile, Reuters reported that Boardriders will use US$600 million in loans to back the purchase. The new debt will include an asset-backed revolving credit facility of $150 million and a term loan of $450 million with a first priority claim, the report added. Bank of America Merrill Lynch (BAML) was said to be arranging the revolving credit facility, with Deutsche Bank leading the term loan alongside BAML and Macquarie Capital. According to Reuters, the proceeds will be used to fund Billabong's acquisition and to refinance debt at both companies.
Moody's said it will review its CAA1 corporate rating for Boardiders in view of the merger, depending on its financing and the timing of the integration process. It finds that the transaction will drive “material cost savings over time” because it combines two premier action sports companies with overlapping product offerings and geographic footprints. The agency's rating applies to a lot of 9.5 percent senior notes due in 2020.
