Billabong shareholders have little choice but to approve a debt-for-equity deal that would heavily dilute existing shareholders and allow private equity firm Altamont Capital Partners to emerge with 40% of the company, according to analysts.

“They’re really being painted into a corner on the debt front,” said Ben Le Brun, a market analyst for optionsXpress. “They need to refinance that debt any way they can. Really, this is the only option available to them. Billabong’s options at this stage are so limited it’s almost a fait accompli.”

As part of the deal announced yesterday afternoon, Altamont will bring in American-based Scott Olivet, a former CEO and chairman of Oakley and former Nike executive, to replace Launa Inman, just 14 months after she was appointed. She was given a brief to turn the company around, but has had most of her attention diverted to dealing with the various offers to buy the company.

As for the financing, Billabong will be given access to a $325 million debt facility, along with another $70 million raised through the sale of ones of its brands, DaKine, to Altamont. This combined $395 million would be used immediately to pay off the company’s current debt as well as to give the company some working cash to see it through the lean years.

In return, Billabong will give Altamont nearly 85 million Billabong options, allowing the private equity company to buy shares at 50 cents over the next seven years. All this will be dilutive to the shares of existing shareholders, including founder Gordon Merchant, whose stake could fall from 14% to 9%.

In early 2012, Merchant — who remains a director on Billabong’s board — famously said he wouldn’t sell the company for less than $4 a share, in response to private equity firm TPG’s bid for a $3.30-a-share takeover. Since then, the company has received no fewer than five other offers from various companies and private equity firms to buy the company, for steadily decreasing amounts. None of those offers came to be presented to shareholders for approval; all fell apart during due diligence checking.

All the while, the company has been under urgent pressure to refinance its debts as its profits plunged, and its share price fell to 25 cents yesterday. Yesterday’s deal offers a solution.

It’s not the first high-profile debt-for-equity deal in recent months. Last October, ownership of Channel Nine was transferred to its biggest creditors, American hedge funds Oaktree and Apollo, leaving former owner CVC Capital holding huge losses. That deal involved a private company, as opposed to the listed Billabong, but it was similar in terms of the logic involved, says Peter Esho, chief market analyst at Invast.

“I think the Billabong deal sets a precedent that distressed businesses are likely to be approached now in the form of a debt restructure, rather than having a private equity firm just buy up their shares,” he said. “I think shareholders need to be cautious of businesses that have a debt burden, as private equity firms are looking at doing things a lot smarter now.

“It’s been happening for a long time in the United States, and this is a very American-style restructure.”

Stephen Mayne, director of retail-shareholder group the Australian Shareholders Association, says there’s an “ongoing issue of the shafting of equity holders during debt workout situations”. “We all accept that debt ranks ahead of equity. But, even so, equity holders all too often receive zero in a workout restructuring situation,” he said.

In this sense, the Billabong deal isn’t so bad. The worst thing for shareholders would have been for the lenders to put Billabong into administration; yesterday’s deal far from wipes out Billabong’s current shareholder base. “If there’s shared upside with the residual equity holders and the new cornerstone investors, which also deals with the debt, then hopefully something can be salvaged of the mess for equity holders,” Mayne said.

Le Brun sees one ray of hope. “They’ve managed to hold onto most of their brands,” he said. “There was a belief Billabong would have to sell the farm. Instead, they’ve got a bridging loan, and held onto brands, including West 49 out of Canada.

“One of Inman’s parting pieces of commentary was about the potential around the US side of the business. If that holds truth whatsoever, they might be able to turn the business around, and have the majority of their brands helping them do that. So even though Altamont would effectively control the company … the current shareholders might end up ahead.”

*This article was originally published at SmartCompany

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