A rocky future ahead for Aussie retailers

BillabongBillabong International has endured a long and protracted battle to recover from a debt-fuelled acquisition spree that left the global surfwear brand vulnerable to plunging sales across its three business divisions.

The company now seems destined to be acquired by Quiksilver, formerly a Victorian surfwear company which is now headquartered in California.

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A merger of the Billabong and Quiksilver businesses was mooted by IRW in early November when Billabong was sizing up Rip Curl as a potential buy.

IRW pointed out that a Billabong and Quiksilver merger had looked a more likely prospect than an alignment with Rip Curl since early 2016 when Oaktree Capital Management took up a majority shareholding in Quiksilver.

Oaktree and another private equity firm, Centerbridge, control around 40 per cent of Billabong shares after a 2012 refinancing deal that stabilised the business in the wake of plunging sales, heavy losses and massive drop in enterprise value as its share price collapsed.

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

Quiksilver, which has changed its corporate name to Boardriders Inc, has made an indicative $1 cash bid for each Billabong share with a takeover facilitated by a scheme of arrangement.

Billabong has allowed Boardriders Inc to undertake a due diligence review of the Queensland-based company which would be valued at $200 million by the bid.

The Quiksilver bid would privatise Billabong, providing an increased capacity for management of the iconic Australian company to implement turnaround strategies that have been in train since 2013.

Relocating Billabong’s head office operations to Quiksilver’s California headquarters would provide significant tax benefits following the reduction of corporate tax rates from 35 to 20 per cent this past week.

The move would also provide access to a larger pool of low cost capital funds and locate Billabong in its crucial Americas market which the company regards as its greatest opportunity for future growth.

It is not known whether or not Gordon Merchant, Billabong’s founder, would support the takeover bid and the company’s chairman, Ian Pollard, has cautioned that a formal offer may not eventuate with a number of legal hurdles that would need to be addressed.

The triggers for the prospective takeover are the emergence of Quiksilver from bankruptcy in March of this year and the renewed interest of Rip Curl’s ownership in a sale of that business.

The Oaktree Capital shareholdings in both Billabong and Quiksilver provide the platform for a smooth takeover albeit the bid price may need to be increased to woo merchant and shareholders who have suffered a wipeout on their investment value in the past six years.

Billabong’s scrip price has fallen from around $13 a share in 2011 to below 70 cents with the Quiksilver takeover news lifting shares closer to the $1 indicative bid price.

Billabong has reportedly decided not to proceed with a formal offer to buy Rip Curl, a deal that would have an asking price of around twice the $200 million value that Oaktree Capital has placed on Billabong.

However, a deal may yet be in prospect with Quiksilver as the buyer rather than Billabong, a deal that could access cheaper funding and the new tax benefits introduced in the USA.

The merging of two or three of the surfwear companies that all started life in Australia would allow a rationalisation of store networks and potentially a consolidation of brands.

A merger of Quiksilver and Billabong would generate annual revenues of around $2 billion while the addition of Rip Curl would tip in about $500 million.

Pollard told shareholders at Billabong’s annual meeting last month that the company was on track with its turnaround plan despite another trading loss for the 2017 financial year.

Pollard and CEO, Neil Fiske, noted an improvement in trading in the Americas division and continuing gains in the European division but ongoing difficulties in the Australian, Pacific and Asian division.

In the event that Quiksilver and Billabong does not proceed to strike a deal with Rip Curl, the Victorian-based business might well attract interest from Super Retail Group or Kathmandu.

Oroton: Where it went wrong

Like Billabong, the current financial problems of luxury goods retailer, Oroton, can also be traced back to an unsuccessful growth strategy.

To survive, it faces a restructure of its operations that seems certain to result in new owners or, at least, a new controlling shareholder and an exit from the stock exchange.

For Oroton, there is no clear path forward despite a six-month strategic review that failed to identify options for a sale or recapitalisation of the business.

Directors of Oroton appointed administrators on 30 November in the hope that Deloitte will be able to re-engage with interested parties and stakeholders to find a buyer or secure new funding.

Established in 1938 by Boyd Lane, Oroton has been controlled by three generations of the Lane family and emerged in the 1950s as a luxury fashion brand selling handbags, wallets and other leathergoods as well as watches and fragrances.

Oroton’s financial difficulties reflect the challenging retail market conditions in Australia over the past five years, as well as increasing competition from online vendors and international retailers such as Coach, Furla, Michael Kors, Emporio Armani and Kate Spade.

However, a key factor in the company’s current crisis can be traced back to two unsuccessful international license agreements that followed a decision by Polo Ralph Lauren to end its 25 year alignment with Oroton in 2013.

The loss of the Polo Ralph Lauren distribution rights shaved around 50 per cent from Oroton’s earnings and, while 2014 indicated some resilience in the business, there was already warning signs in the retailer’s 11 Asian stores which racked up losses of $3.4 million.

In that year, Oroton opened 10 Brooks Brothers stores under a new but short-lived license agreement that had been expected to generate sales of around $50 million by 2018.

Amid mounting trading losses, Oroton and Brooks Brothers parted ways in 2015 after just two years.

In the same period, Oroton was bleeding as a result of losses from the six Gap stores it opened under a 2013 license agreement with the US apparel retailer.

In August of this year, Oroton terminated the Gap license agreement under a plan that will have all stores closed by January next year.

For FY17, Oroton posted a $14.3 million loss, reflecting the ongoing drag on the retailer of the Gap outlets and a sharp six per cent decline in comparative sales across its stores.

The company effectively lost $10 million in revenue for FY17 which racked up around $11.2 million in costs associated with the termination of the Gap license and other asset impairments.

Oroton’s share price has fallen from $2.44 to 43 cents in the 12 months to 30 November this year when it was place in the hands of administrators, leaving an equity value of around $20 million before liabilities which are understood to include $35 million in debt with the Westpac bank.

In September, Oroton CEO Ross Lane said trading in the early weeks of 2018 had been ahead of the previous year and, while it is understood that sales have been less buoyant since then, it is planned to keep all stores trading until at least Christmas while administrators seek a buyer or new capital funding.

Lane said in a statement issued to the ASX last week that directors hoped a stronger Oroton would emerge from the administration process which would provide the flexibility to further restructure the Oroton Group.

Oroton currently has 62 stores and 12 concessions across Australia, New Zealand and Malaysia, and employs 550 full-time, part-time and casual staff.

A meeting of Oroton creditors will take place on Monday 11 December.

 

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