Billabong wallows in the shallows

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This was published 11 years ago

Billabong wallows in the shallows

By Leonie Lamont

SURFWEAR retailer Billabong experienced a wipeout on the market, losing $229 million as it came out of a trading halt on the back of an earnings downgrade and a $225 million capital raising.

Its value was slashed as the share price of last week plunged from $1.83 to close yesterday at 96¢, down 47.5 per cent.

Wavering, not drowning: Billabong plunges into unknown territory.

Wavering, not drowning: Billabong plunges into unknown territory.

However, institutional investors have already priced in the six-for-seven rights issue, with Bloomberg reporting a theoretical extra-rights price (TERP) of $1.46. Using that benchmark, Billabong shares are 35 per cent down on the TERP.

Billabong had priced in a 44.3 per cent discount for the $1.02 rights issue. Yesterday more than 11 per cent of its stock was traded, pushing the share price 7 per cent below the rights issue.

The hammering raises questions about the retail component of the offer, which is scheduled to take place between this Friday and Tuesday July 17 and aims to raise $67 million. It is expected that retail shareholders will keep their options open as close as possible to the cut-off date, and the final fate of the share price. Both the retail and institutional offers have been fully underwritten by Goldman Sachs and Deutsche Bank.

Yesterday, Billabong announced that it had completed the $155 million institutional offering, with 79 per cent taking up their entitlements. Billabong founder Gordon Merchant has previously announced he would buy $30 million new shares under the offer, representing 85 per cent of his entitlement.

The company said it expected the new shares would start trading this Friday.

Citi analyst Craig Woolford said costs were still far too high. He said he expected more store closures than the company had flagged, and the axing of up to half its brand lines - given that six of them had less than 2 per cent of sales. Billabong has announced it will close 140 stores by the 2013 financial year. He reiterated the drop in earnings was threatening lending covenants.

Billabong expects underlying earnings, which exclude one-off costs from the restructure, to be $130 million to $135 million for the year to June 30. This is down from its forecast of earnings slightly above $157 million when it announced plans for a major restructure in February. Billabong says the capital raising will reduce its forecast net debt from $325 million to $100 million.

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While the balance sheet provides a bit more time, investors would need to be convinced about guidance for fiscal 2013, CBA analyst Jordan Rogers said.

''If Billabong management get the strategy right and execute to design, the recovery potential in this stock would be extraordinary, but so are the odds of achieving this outcome so late in the day,'' he said. ''The capital raising gives some time, but the next six months will be crucial for the business.''

In a note, JPMorgan said the capital raising appeared rushed, and also queried Billabong's decision to partially sell Nixon, its US watches and accessories business for the youth market. Nixon, it said, was a high-margin and growing business, and its performance had masked the deterioration in core Billabong business in recent years.

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It highlighted concerns whether Billabong could deliver on its costs reduction, and that the amount of money required for it to ''reactivate'' itself might be higher than planned.

With AAP

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