Not waving, but drowning?

The 21 November shareholding meeting of Billabong International, the iconic Australian surf and skate brand, may well focus on a change to the company’s rebuild plans.

Billabong International’s spectacular growth crashed in 2011 as international sales declined, acquisitions failed to fire and the debt binge that funded those acquisitions loomed as a major threat to the survival of the company.

Founded in 1973, Billabong International’s products are licensed in more than 100 countries and are available in approximately 10,000 locations worldwide.

The majority of the company’s revenue is generated through wholly-owned operations in Australia, North America, Europe, Japan, New Zealand, South Africa and Brazil.

The company is listed on the Australian Stock Exchange (ASX), but around 40 per cent of shares are controlled by private equity firms, Centerbridge and Oaktree, following a 2012 refinancing deal that stabilised the business.

When Billabong International was at its lowest ebb, directors, management and private equity suitors all contemplated the potential of a merger strategy with either Rip Curl or even the struggling Quiksilver, which was listed on the New York Stock Exchange at that stage.

With mounting losses over six years, suspension from the New York bourse and, in 2015, a filing for bankruptcy, a Billabong International and Quiksilver merger was a live option.

Rip Curl was in much better shape than its international rivals, but was up for sale during that period.

The Billabong International and Quiksilver merger has looked like a more likely prospect since early 2016 when Oaktree Capital Management took up a majority shareholding in Quiksilver.

Quiksilver emerged from bankruptcy in March of this year after a restructure that included store closures, changes to distribution networks and rationalisation of inventory.

Oaktree Capital Management currently owns around 85 per cent of Quiksilver, which currently has estimated annual sales of about $1.1 billion.

However, such a merger has not materialised and, up until recently, Billabong International has continued to streamline its business, divesting loss-making operations.

After significant restructuring which has closed stores and divested several businesses, including Tigerlily in the 2017 financial year, Billabong International has almost halved its annual sales over the past six years to around $980 million.

At the forthcoming AGM, shareholders are now expected to hear the details of the further restructuring of Billabong International, which could include the acquisition of Rip Curl and the online vendor Surfstitch.

The incorporation of Quiksilver in a restructure cannot also be ruled out, albeit a merging of three surfwear companies would no doubt require approvals from competition regulators.

Billabong International is reportedly undertaking due diligence on the Rip Curl business, although no formal notification has been made to the ASX.

Billabong International is also understood to be assessing the purchase of Surfstitch, a business in which it was formerly the largest shareholder.

A suitor for Rip Curl

When Rip Curl was being touted for sale 2013, the private company’s shareholders were seeking at least $400 million through a trade sale or float on the ASX.

A sale was abandoned by Rip Curl directors, including founders Doug Warbrick and Brian Singer, with around 72 per cent of the issued scrip, because of the adverse impact of both Billabong and Quiksilver’s trading woes.

In 2015, Rip Curl was valued at $310 million as part of a share buyback.

Rip Curl posted annual sales of $485 million and net earnings of $18.44 million  in the 2017 financial year.

Advised by the financial firm, Gresham, Rip Curl’s directors have reactivated sale plans and based on current trading performance are again keen to achieve at least $400 million to $450m for the business.

Quiksilver and Rip Curl were all founded in the Victorian coastal town of Torquay, near Geelong, while Billabong International started on the Gold Coast in Queensland.

All three have taken divergent paths in recent years with Rip Curl remaining a private company controlled by its founders, Billabong International floating as a public company in 2000 and Quiksilver crossing the Pacific Ocean and listing on the New York Stock Exchange.

Indications that Billabong International has emerged as a serious suitor for Rip Curl is somewhat surprising, given that its turnaround strategy has relied on the divestment of a number of businesses acquired in the expansion spree that hit the wall in 2011.

Billabong International’s share price is languishing at around 64 cents, a far cry from the more than $13 price in 2008 and even 11 cents adrift of the 75 cents price prevailing when FY17 results were announced last September.

The company announced a $106.5 million writedown on its FY 2017 accounts that led to a net loss for the year of $77.1 million.

Since 2013, under the private equity investor guidance and the management of CEO Neil Fiske, Billabong International has narrowed its strategic focus to concentrate on its core brands and customers, invest in building an omni-channel platform, and restructure its capital.

While FY17 results were hardly inspiring, Fiske was surprisingly upbeat about the results as was chairman, Ian Pollard, in a letter to shareholders that claimed considerable progress in reducing the costs of doing business, improving gross margins and earnings, and lifting performance in the Americas market.

Enter: Centrebridge and Oaktree

Acknowledging there is still much work to be done to complete a turnaround in the fortunes of Billabong International and a return to sustainable and profitable growth, it seems Centrebridge and Oaktree Capital find Rip Curl too tempting to resist.

A merger of Billabong International and Rip Curl would be easier to accomplish than with Billabong and Quiksilver, which is now headquartered in California, but they’re not necessarily out of contention.

Certainly, Oakridge Capital would achieve effective control of all three surfwear companies if Rip Curl agrees to sell to Billabong International or a related entity.

Centrebridge and Oakridge Capital have already restructured their financial backing in Billabong International, which would need to find backing for any acquisition, given its market value and cash position are lower than the Rip Curl target it is apparently keen to buy.

The acquisition of Rip Curl could create significant savings through operating synergies and, unlike Quiksilver, it is generating profits.

The acquisition would be likely to lead to further store closures but Billabong International would be expected to pursue a multi-brand retail strategy.

Combined, a merged Billabong International and Rip Curl would have sales of close to $1.5 billion.

Rip Curl clearly is a much stronger business than the various retail chains and sportswear brands that have been divested in the past five years, as Billabong International has struggled to cut debt levels and rebuild profitability.

Billabong International’s main brand focus now is on the Billabong label, RVCA and Element although it also has a number of subsidiary brands, including Vonzipper, Surf Dive ‘n Ski, Honolua, Xcel and Kustom.

The addition of the Rip Curl brand would provide a significant boost in marketing terms for Billabong International and could lead to the creation of new store formats and expanded product ranges in non-competing store locations.

These changes could enhance and complement other turnaround initiatives already underway at Billabong International, including the development of global platforms that encompass sourcing and concept-to-customer supply chain initiatives.

A merger would also reduce global logistics and distribution costs and might also lead to expanded online retail platforms which might provide a rationale for Billabong International also acquiring Surfstitch.