Balance Sheet The Biggest Worry If Billabong Deal Does Not Come Off

Photo: Getty/Mark Metcalfe
Shares in embattled retailer Billabong have been suspended, indefinitely, so that it can continue takeover talks with two private equity outfits.

“The company requests that the suspension remain in place until such time as the company is able to make an announcement in relation to such negotiations,” Billabong said in statement to the market on Thursday.

The company made the call before its shares were due to be taken out of a trading halt today.

After six potential offers have been taken off the table since early 2012, the surf wear company’s biggest worry if a suitable deal isn’t reached could be its balance sheet, and the leases it holds on bricks-and-mortar stores.

“My biggest concern is the balance sheet,” Deutsche Bank analyst Michael Simotas told Business Insider Australia.

Simotas, who is based in Deutsche Bank’s Sydney office, said that if a deal does not eventually come through, there is a good chance Billabong will need to raise equity given its tight fixed charges cover.

Given leases are effectively off balance sheet debt, Simotas said they would influence banks’ decision about whether to provide Billabong with debt funding.

Billabong is in simultaneous talks with a consortium led by US-based Billabong executive Paul Naude and private equity firm Sycamore, which made a $1.10-a-share bid in December.

After that, another consortium made up of VF Corporation – owner of The North Face and Timberland outdoor clothing brands – and US-based investment firm Altamont Capital Partners came to the table.

They matched matched the $1.10-a-share offer in January.

Now, reports suggest that both companies will lower their bids to between 70 and 80 cents per share.

“Given the nature of the parties involved and the information advantage from the participation of Paul Naude, we believe the probability of a bid proceeding exceeds 50%, albeit at a lower price than the original $1.10 offers,” said a recent UBS Investment research report.

The UBS note also said that Billabong’s share price now reflects “fair value from a risk reward perspective,” upgrading its rating from neutral to sell.

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