Merchant makes a stand at Billabong

Gordon Merchant, the founder and largest shareholder of surfwear giant Billabong, has made it very clear where he stands on the takeover bid for the struggling company lobbed by private equity firm TPG – he won’t be selling out unless the money is much, much higher.

Billabong formally knocked back TPG’s original offer of $3 a share for the business two days ago, with the board and Merchant trotting out the standard line from a takeover target – “This offer substantially undervalues the company.”

TPG countered with a bid of $3.30 almost immediately. In response, Billabong released a letter written by lawyers for Merchant which contained a pretty blunt message – I wouldn’t even sell for $4 a share.

“[We] do not support Billabong taking any steps to assist or facilitate a proposal by TPG Capital, including allowing TPG Capital to commence due diligence on Billabong, even if the price TPG Capital offered was $4.00 per share.”

Ever since TPG emerged a few weeks ago as a potential bidder for Billabong we’ve been wondering about Merchant’s thoughts on a merger.

Company founders are traditionally loath to sell their babies, particularly to an opportunistic private equity firm that has seized on the fact Billabong is being forced to sell assets (including its prized Nixon brand), slash costs and basically wait for consumer confidence to turn around.

Merchant, like so many Billabong shareholders, can well remember the heady days of 2010, when Billabong shares were trading as high as $12.

You can understand why selling out at $3 or $3.30 or even $4 would be particularly galling.

Nevertheless, the world is a very different place than it was just two years ago and the retail sector is almost unrecognisable.

The march of the internet, fragile consumer confidence, higher cotton prices and seemingly never-ending rounds of discounting have crunched sales and profitability.

Many retailers, wholesalers and manufacturers were slow to respond to these changes. Billabong, which invested heavily in buying up retail chains in recent years – and will now close up to 150 of its stores – has arguably been slower than most.

Merchant might not want to sell cheaply, but Billabong’s independent directors need to seriously assess what the company is really worth in the current environment.

In the context of a structural change, an offer of $4 a share (or even $3.30 share) might be a reasonable price. It should at least force the board to ask themselves some tough questions, such as whether the current board and management can restore the company’s fortunes above that valuation. And if so, how quickly can they do it?

Many are the companies who have knocked back a takeover bid that looked low at the time, only to see the company continue to struggle and the share price fall.

Merchant, as company founder, is clearly a voice the Billabong board is listening to – a point reinforced by the release of his letter to the board.

But should the board really not take “any steps to assist or facilitate a proposal by TPG Capital” as Merchant says?

I don’t think so. The talks should continue unless the board is very, very confident it can quickly restore Billabong to its former glory.