24 February, 2012 24 February, 2012

The Billabong Balance Sheet and the J-Bay WCT

News filtered through the SA surf community in the early hours of this morning of the Billabong Pro Jeffreys Bay being downgraded from a WCT to a 6 star.

It another donga on the rocky road that two of surfing’s big organizations find themselves on: the ASP has announced four major changes in just about as many months (three WCT changes, and the CEO resigning), and it’s a reflection on Billabong’s current balance sheet squeeze.

From its AUD $9 share price highs at the beginning of 2011, the Billabong shares took two big falls this year on the Australian Securities Exchange, once on mid year results, and once on a yearend profit warning. The share bottomed out at $1.75.

Despite the declining profit, Bong of course still has enormous EBITDA figures, in the billion rand range, and revenue has grown. The company’s biggest hurdle is balance sheet related. As of mid 2011 it had a reasonable debt to equity ratio of 61%, but falling profitability over the second half of the year would have changed that position, and could have placed them at risk of breaching their debt covenants (agreements between a company and its creditors, often the banks, that the company will operate within certain limits, for example maintain a certain level of gearing).

In financial parlance, this often results in offloading assets to service the debts. Last week Billabong did just that, selling half of Nixon. Some believe that doesn’t solve the problem. According to a Bank of America Merrill Lynch report, “Not only are earnings falling at an accelerating rate, but the company is rapidly consuming cash. While a capital injection may be a short term reprieve, we believe it is unlikely to improve Billabong’s underlying structural issues or strategic position.”

Companies with sharp price declines are often the targets of private equity firms, and Billabong has had two offers from TPG Capital to buy the business, at $3 a share. Since the share is now trading at $2.90, you know at least some investors out there are betting on that happening. However Billabong management is in a position where five major shareholders, including company founder Gordon Merchant, control 45 percent of the stock, although if the company is recapitalised this might not remain the same.

Along with the sale was a major global cost restructuring announcement, including closing down of some unprofitable stores worldwide. Part of that cost restructuring became obvious to us in South Africa this morning, with the Bong J-Bay going down to six star status.

Whether this is good or bad for SA surfing is open for debate. It will be the first time since 1997 that we haven’t held a WCT level event on our shores. In terms of the opportunity to watch the world’s best surfers at one of the world’s best waves, we are all poorer for it. Travis Logie and two time winner Jordy Smith will lose the home ground advantage they had for the July leg.

Where it does help us is that the qualifying bunfight is financially and logistically difficult for our surfers. For Shaun Joubert, Royden Bryson, Brandon Jackson, Beyrick de Vries, Dale Staples, Mike February and the others who are slogging it out through the system, they previously only had one opportunity a year, at the Mr Price Pro for those that make it in, to earn serious points without outlaying serious amounts of cash. This opportunity is now doubled up. A global Billabong cost restructuring exercise could paradoxically benefit our surfers.

We might not get to watch Slater this year, which we didn’t get to last year anyway thanks to the Fiji swell, but we may reap the rewards of having more surfers on the WCT in years to come.

Facebook pic: The debate rages on whether or not the downgrade is a good thing for SA surfing, but there are a few SA pros that are relishing the chance to score some valuable QS points utilising home court advantage – Shaun Joubert & Dale Staples were amongst them:

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