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Billabong: how many waves will the stubborn surfie miss?

Billabong executive Paul Naude is set to lodge a firm bid for the company. But will investors take the money and run? Or will Gordon Merchant again hold out for more?

Toot toot! That’s the sound of Australia’s biggest corporate train wreck rolling around the corner in the shape of beleaguered surfwear group Billabong.

The company entered a trading halt yesterday, citing a forthcoming announcement about a takeover. The source of the bid is executive Paul Naude, who stepped aside from his duties a few weeks ago in order to put a takeover together.

Naude has now gone away and got debt and equity finance, with the US buyout firm Sycamore Partners behind his plan.

According to The Australian Financial Review, the price of the bid will be $1.10 a share. Billabong closed on Friday at 94 cents a share and shot up 7% in early trade yesterday, before the trading halt was put in place, which suggests word of the bid got out somewhere.

Management buyouts aren’t unheard of in Australia, but they are infrequent in the listed company space.

Naude’s bid is notable for a few other reasons. Firstly, as head of Billabong’s American division, he is in no small way responsible for the terrible state of the company’s finances and market position. Even with his current leave of absence, it’s a fair question how he’s retained his position. Secondly, Naude’s is the third takeover approach the stricken surfwear group has received this year.

First, in February, came a $3.30-a-share bid from private equity firm TPG, which was rejected by Billabong founder Gordon Merchant, who decided he wouldn’t take less than $4. After Billabong’s trading position deteriorated and a $225 million capital raising saw its share price fall to 96c, TPG made another bid in October at $1.45. The private equity firm eventually abandoned the bid.

Later that month, fellow private equity firm Bain ran its eye over Billabong, only to abandon its bid in a matter of weeks.

The stumbling block for Naude’s bid, as with all these deals, is Merchant, who holds 14.5% of the shares and would appear to believe the company is worth far more than the market says.

But the surfie was so roundly criticised for rejecting the first bid that he and the Billabong board will need to look closely at Naude’s pitch.

Ironically, Naude and Merchant will probably come to the negotiating table with a similar perspective. They are both insiders who know the strength of the brand intimately and feel the market is taking a short-term view of a company with strong prospects, in a better market.

But once again, the $527 million question is: what’s the right price for company that was worth almost $6 billion just a couple of years ago?

For long-suffering Billabong shareholders, the best they can hope for is that the $1.10 offer is the starting point for negotiations, rather than the final offer. But what will it take to convince Merchant?

*This article was originally published at SmartCompany

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