Summary

  • Billabong has faced a number of well-documented challenges in seeking to stabilise its position and refinance its debt.
  • The Takeovers Panel recently found that penalty payments in its refinance package infringed on takeover laws by locking out other potential proposals and by excessively coercing shareholders to vote in favour of the deal.
  • The decision highlights to difficulties in balancing takeover regulation with the commercial realities of loan-to-own transactions, especially where companies are wounded but not dead.

Introduction

Surfwear company Billabong has been receiving its fair share of attention recently, as it tried to find its way through the perfect storm of problematic business conditions, a significant debt burden and a series of potential takeover bids at ever-decreasing prices, none of which were able to launch successfully.

The concerns raised by the Takeovers Panel over aspects of Billabong’s refinance deal with Altamont highlight the difficulties that are faced when balancing takeover regulation and the interests of shareholders with the commercial realities of lenders in loan-to-own transactions.

The Altamont deal

While Billabong certainly had some significant problems to deal with, it was not a “failed” company – there was still real value left on the table for shareholders.

After an extended period of uncertainty and price reduction, Billabong finally announced a refinancing deal with an Altamont-led consortium in July 2013. The deal caught the attention of the market not only because it provided some welcome relief and certainty, but also because the terms included some relatively unusual features favouring Altamont.

The deal would provide Billabong with the $400 million it needed to replace its existing debt facilities and meet anticipated working capital requirements. It involved an initial bridge facility which, subject to documentation and shareholder approval, would roll into a longer term arrangement.

In addition to contemplating the sale of one of Billabong’s assets to Altamont, the deal envisaged Altamont being issued various forms of equity in Billabong which, in total, would give Altamont up to 40% of Billabong’s expanded capital. This element of the transaction required the approval of Billabong’s shareholders.

In connection with this arrangement were several features which helped to ensure that Altamont would stay in the box seat, namely:

  • a termination fee of up to $65 million if Billabong underwent a change of control and, as a result, repaid the bridge facility rather than replacing it with Altamont’s longer term funding package,
  • an additional interest component of about $9 million per year if shareholders voted down the issue of equity, and
  • a requirement that the long-term facility be compulsorily repaid if Billabong underwent a change of control, with a make-whole payment of up to $100 million if the change of control happened in early years.

The Panel challenge

Billabong’s relief at locking down the Altamont deal was short-lived, when a competing consortium led by Oaktree and Centerbridge (who, by that time, had acquired most of Billabong’s existing debt) commenced proceedings in the Takeovers Panel. The competing consortium had proposed an alternative transaction, but by the time it was ready to launch the Altamont deal had already been inked.

The competing consortium alleged, and the Panel agreed, that the termination and make-whole payments were unacceptable lock-ups which would deter competing proposals, and that the ‘naked no vote’ fee in the form of the additional interest payment was likely to coerce shareholders to approve the deal.

Altamont and Billabong saw the writing on the wall, and re-cut their deal. Essentially, the fees and other payments have been substantially removed. However, the underlying cost of the debt package has increased as a result.

Subsequently, the competing consortium has recommenced is overtures to the freshly ‘unshackled’ Billabong. Only time will tell how the saga will play out.

Comments and implications

We have now seen several examples of loan-to-own transactions in the Australian market, and there is nothing unique or inherently objectionable about using a troubled company’s debt to leverage one’s way into an ownership position. Generally, shareholders grudgingly vote the deal through once they conclude that there are no better options available. The problem with Billabong’s original deal was that the overall effect of the arrangement was to effectively pre-package the outcome before shareholders had the opportunity to vote on it.

Companies such as Billabong are not in an easy position. They are not at the ‘good’ end of the spectrum, where healthy companies are taken over under usual and well-understood procedures. But nor are they ‘failed’, such that equity is wiped out and the lenders have been handed the keys.

In this middle ground of distressed-but-still-breathing companies, conflicting priorities can abound, and the demands of stakeholders can diverge.

Companies in this position should bear in mind a couple of key points:

  • All of the rules that apply to healthy companies continue to apply. Shareholders should still have a say on who acquires a significant stake in the company, and the interests of shareholders still need to be considered. Put another way, all of the usual takeover laws and policies continue to apply.
  • However, at the same time, the lenders (current or prospective) are holding most of the cards. Justifiably, they may want enhanced levels of protection, especially if their investment strategy involves acquiring a large piece of the company as the price of their debt. Hence directors can only work within the range of options that lenders will actually accept. In circumstances where equity is close to being wiped out, lenders are likely to have more flexibility.

In summary, commercial reality can make the general principles very difficult to apply in practice.

For most companies – and most lenders – the Billabong decision will not change the landscape.

However, those at the more distressed or ‘exotic’ end of the market may need to think more carefully about whether their deal looks and smells like a change of control transaction. If it does, then they will need to be especially vigilant to ensure that the terms don’t inadvertently contravene the rules and regulations that apply generally in to takeovers.