Billabong takeover offer sees shares fall 13

It’s not the way things usually go. Australian listed apparel and retail group Billabong International (BBG) was again subject to a takeover offer, the second in as many months, this time a much expected $1.10 bid from a consortium led by a former US executive. Shares however didn’t rise towards the $1.10 offer price, they went the other way as anticipation around the deal quickly turned to sorrow after an accompanying trading update.

Yesterday before the offer, we wrote:

Without having a look at the detail, our initial impression is the deal at $1.10 per share will have little difference when shares resume trading for three key reasons:

1)      The board is very unlikely to accept a highly conditional $1.10 given the elimination of debt this year, the promise of a strong earnings turnaround and recruitment of a well respected industry leader in Launa Inman. Accepting $1.10 would either imply a huge earnings decline since guidance was last issued or complete capitulation – both unlikely given the elimination of debt this year.

2)      Long suffering shareholders won’t be too pleased with the board accepting and endorsing $1.10 given much higher indicated approaches earlier during the year. Those who bought the shares at $0.80 might think differently, but a large majority would be hard to convince at current levels. It’s also worth noting at the recent AGM, Paul Naude received the highest dissatisfaction rating among fellow directors – 44.65% voted against his re-election.

3)      The shareprice has already run up hard in anticipation of this offer so the news is already largely priced in. Billabong shares bottomed at around $0.74 on very low volumes recently and the appreciation in shares is coming off a low base.

Today’s surprise is not necessarily the $1.10 offer but the fact that Billabong hosed down earnings expectations and talked up the likelihood of impairments to its balance sheet position due to underperforming assets. The wording in Billabong’s statement tends to fall between an earnings decline and growing capitulation that the board is not in complete control with earnings continuing to decline.

Bottom line: The Billabong case is a great example of caution around corporate takeovers. It’s not always clear cut and traders don’t always make money when a bid is announced. All things should be taken into consideration. Billabong’s best case scenario now is that the takeover, even though subject to several strict conditions like 90% acceptance, progresses. That means upside is probably capped at around $1.10. Another competing offer shouldn’t be completely ruled out, however today’s price action implies the business is going to continue struggling before any light emerges at the end of the tunnel. Shares could continue to trade within a band of $0.74 (52 week low) and $1 per share, their high prior to the bid being announced.