Picking Up Another Down (Under) And Out Brand

By Reuben Brewer - February 26, 2013 | Tickers: BLLAF, COST, FNP, ICON, JCP, M, SKS, TGT, VFC, WMT | 0 Comments

• Email
• Print

Billabong International (NASDAQOTH: BLLAF) is in play, again. The struggling surf focused clothing maker and retailer has seen its shares fall materially over the last year or so. While there have been several bids so far, some at higher prices, none have been consummated. With two competing bids, one including giant V.F. Corp (NYSE: VFC), is the brand finally going to get bought?

In Play

Billabong's brands include the Billabong, Element, Von Zipper, Honolua Surf Company, Kustom, Palmers Surf, Xcel, Tigerlily, Sector 9, DaKine, and RVCA nameplates. The company makes and sells its products through its own stores and through other companies' stores. The main focus is on the “boardsports sector,” which basically means the company targets surfers.

While once a hot brand, it looks increasingly like demand has peaked. Indeed, the company's top line has been volatile at best since the 2007 to 2009 recession, with the bottom line falling in each of the last four years. In fact, in a letter to shareholders last September, the company's chairman stated that the market's “trends tested Billabong’s business model, which in recent years has been transforming from a multi-brand, wholesale-focused operation to a multi-brand wholesaler and multi-banner retailer.”

The company is working to right its business, which may not be an easy task. The departure of high level employees is particularly noteworthy and a troubling sign.

Who's Buying?

There are two bids for the company today, one from a board member in conjunction with a private equity shop and one from V.F. Corp and a private equity shop.

V.F. Corp is best known for its jeans brands, such as Lee and Wrangler, which is where its business started. Management, however, realized that there was only so much growth available selling jeans and underwear, another of its big areas at the time. So it started to buy up other brands, including Nautica, The North Face, Vans, and Seven For All Mankind.

In short, the company has very successfully turned itself into a branded apparel company over the last decade or so. Its collection of brands now stretch from Wal-Mart to its own branded boutiques, some of which are quite expensive to shop at. Although it recently took on a large acquisition with the purchase of Timberland, adding Billabong would fit nicely with the company “sports” focus.

Does it Work?

Some of the benefits of a purchase would include V.F. using its size and scale to lower costs, building off of its relationships with other retailers to broaden distribution, and using its expertise at running its own stores to shift Billabong back into expansion mode.

Interestingly, it seems as though Billabong is the main brand in which VF is interested. This suggests that the company's bid will result in Billabong being broken apart, with VF getting the namesake brand and its private equity partner getting most, if not all, of the other brands. If this were to take place, it would be a good move for VF.

Going Private

While a split up would work for VF, a counter bid would put the entire company in private hands. This would also work well for Billabong, as it would allow the company to focus on turning its business around without having to deal with the demands of investors. So, either one would be good for the company's business.

The only problem is that earlier bids were at higher levels. So while management shunned those deals as not valuing the company properly, performance hasn't improved, so the current, lower, bids might be more agreeable now. Then again, maybe not.

Not the Only Option

Reuters recently leaked the news that Fifth & Pacific (NYSE: FNP) is shopping its Juicy Couture brand. While the company won't comment on such rumors, a sale could help Fifth focus on its other brands and allow the acquirer to turn around a still well known brand. Fifth & Pacific used to be known as Liz Claiborne, a brand that it sold to J.C. Penney in 2012.

The company's other brands, including Kate Spade, Jack Spade, Lucky Brand Jeans, and Adelington Design Group (jewelery), are performing better than Juicy. If the company is, indeed, looking to sell, VF might be interested. VF could easily bring the same tools to fix Juicy as it would to fix Billabong, so missing out on the Billabong purchase wouldn't be the end of the world for VF.

Iconix Brand Group (NASDAQ: ICON)?

Its interesting that Iconix Brand Group isn't involved with the Billabong rumors. Iconix is different from V.F. in that it doesn't actually sell things. It simply owns brands that it lets other people sell. This separation leaves Iconix to focus on “promoting and elevating brands in the marketplace.” Billabong is a well known brand and would fit easily into the company's collection, which includes Candies, Bongo, Joe Boxer, Mudd, Ocean Pacific, Ed Hardy, Ecko, Danskin, Lodon Fog, Rocawear, Umbro, and Sharper Image.

With relationships ranging from Target and CostCo to Bloomingdales, owned by Macy's, and Saks Fifth Avenue, the only complication for Iconix would be Billabong's store base. Of course closing or selling off the stores probably wouldn't be that hard. It has already added the Buffalo and Lee Cooper brands so far in 2013, so it may not be interested in yet another purchase right away. That said, collecting brands is the company's core business, so it might want to be involved at some point—perhaps if the two current bids fail or if the private equity shops struggle with the turnaround.

Priced for Failure

At present, the offer price for the two deals are well above the current stock price of Billabong. Investors, having been burned before by failed deals for Billabong, don't appear to be standing in line to risk another deal falling apart. VF, however, is a smart and capable company, if Billabong's books are clean, it makes complete sense that the deal would go through. The competing deal, meanwhile, has an insider attached to it, which suggests it, too, has material merit.

The discount to the proposed deals could present a buying opportunity for extremely aggressive investors. That said, if VF prevails, it would be yet another solid brand for the company to exploit, which would be a win for that company's investors.

• Email
• Print
• Feedback