Billabong (BBG.ASX) – Merger Arbitrage – 4% upside

Current Price – A$0.96

Merger Consideration - A$1.00

Upside – 4%

Expiration Date – April 9, 2018 (expected)

Acquisition Announcement

This idea was shared by Matt.

 

This merger arbitrage presents an opportunity to make ~4% upside in less than a month or potentially only a couple weeks if you wait until closer to the shareholder vote date. The transaction is well progressed, the buyer is logical, knows the business well and the transaction has the support of the Board and 39% of shareholders eligible to vote. 

 

Key data points:

  • Boardriders (previously known as Quicksilver and controlled by Oaktree Capital Management) to buy the 80.7% of Billabong (ASX:BBG) it doesn’t already own for A$1.00 cash.
  • Independent Expert (i.e. fairness opinion) said the offer price is fair and reasonable.
  • Board of directors unanimously recommends the deal.
  • Centrebridge Partners and Gordan Merchant (ASX:BBG founder) who combined own 39% of the shares eligible to vote agree to vote in favour of the deal.
  • Oaktree owns an additional 19% of ASX:BBG but these votes will be excluded from the shareholder vote.
  • The transaction is subject to limited conditions and not subject to due diligence or financing.
  • In the absence of the transaction, the company will likely have to do a large equity raising to reduce debt (Oaktree is a major lender) so there is a strong incentive to vote in favour.
  • The shareholder vote to approve the deal 28 March.
  • Effective Date of the transaction (i.e. last day traded) 9 April.
  • A detailed overview of the transaction, pro’s/con’s and risks is in the Scheme Bookle 

 

Why The Opportunity Exists?

  • I think the main reason is ASX:BBG will be removed from the ASX300 index from March 19 and index funds are forced, sellers. Prior to this announcement ASX:BBG traded closer to the A$1 offer price.
  • In late Jan/early Feb 2018, Pierre Agnes, the CEO of Boardriders went missing after he went fishing in the Atlantic and was declared dead. Subsequently, Boardriders has now announced a transformation of its management team and reaffirmed its commitment to complete the acquisition of Billabong International Ltd. as previously announced. The share price did not react negatively to this news so I think mostly forced selling is driving the upside opportunity.

11 COMMENTS

  1. work 22

    FYI:

    FYI, from the Australian Financial Review (http://www.afr.com/business/retail/clothing-and-accessories/proxy-advisers-backs-billabong-takeover-20180315-h0xifd):

    SS said that $1 per share offer was a significant premium, and the independent expert Grant Samuel & Associates
    has deemed it fair and reasonable.
    “The advantages of the proposed scheme appear to outweigh the disadvantages,” ISS said it in its report. While the proxy firms have backed the bid, along with the independent expert, top independent shareholders Adam Smith Asset Management and Ryder Capital have on several occasions told The Australian Financial Review they were underwhelmed by the offer. They hold a combined 15.35 per cent stake. While the pair can’t block the deal by themselves, a successful vote will hinge on turnout and Billabong’s get-out-the-vote efforts, as well as the level of support by investors affiliated with major shareholders. Sources said it was unlikely for a 100 per cent turnout, given 66 per cent voted at the last annual meeting. If one assumes a 75 per cent turnout, 45.39 per cent of the register needs to be voted in favour of the scheme for it to pass. In other words, a 15.13 per cent vote against could block the deal. Institutional investors California-based Hollencrest Capital Management and Active Owners Fund declined to comment, while it is unclear how Netwealth Investments and Mosaic Funds will vote their proxies.

    1. Vincent

      Kind of hard to judge if “being underwhelmed” by an offer means if you are going to vote against the deal. Anyone here who has some additional thoughts about this?

  2. Alex15

    Thank you for sharing this idea. Where is the threshold for the deal to pass?

    If I look at the stock price during the last years underwhelmed might be a the first word I can think of if someone is buying me out. From an overview I don’t find it really convincing that Adam Smith Asset Management and Ryder Capital will vote against the deal or even convince other shareholders to vote against it. The Scheme Consideration represents an attractive premium and downside therefore looks significant. So why should they vote against the deal if they don’t have better plans for the company?! Is there any indication the company is worth more than A$1.00?

    I would assume (I am not familiar with Australian takeover law) there is no way for a higher price (like short form merger, Domination and Profit and Loss Transfer Agreement) since this is decided by Scheme.

    What I found really odd is the disappearance of the CEO in the middle of takeover.

    1. M

      Threshold answer is found in Section 3.2 (page 26) – https://www.asx.com.au/asxpdf/20180214/pdf/43rkvbcxd7jjw2.pdf

      Ryder and Adam Smith bought their stakes in mid-late 2017 so actually should do well due to the takeover premium compared to long-term holders that have been obliterated over the years. Clearly, they think the company is turning things around, worth more than $1 or are sceptical of the premium paid buy an insider. They haven’t said they are voting against the deal (to the best of my knowledge) so it might just be a case of them pushing for a better offer and the only leverage they have is the risk they can convince others to block the deal.

      In relation to your legal question. Another bidder can make a higher offer up until certain dates (read the document for exact ones). However, Oaktree has the standard matching rights and if the deal is terminated standard break fees. BBG isn’t allowed to shop the business around so any rival offer would be based on the public documents, not private due diligence. This is all standard stuff. Without knowing exactly what went on behind the scenes I suspect the Board was faced with an upcoming debt issue that needed to be solved (equity raise etc.). The options were dilute shareholders. Oaktree is smart and probably are timing this to get a good return so have made an offer that solves the Boards goal of maximising shareholder value. The Board would have then considered trying to find other offers and the certainty of a bid from a highly logical buyer with minimal conditions vs. other options. Thus they determined it was in the best interests of shareholders subject to a fairness opinion. That fairness opinion agreed. I respect both funds views and the fight for higher value. If they get it good on them. However, if they don’t and the deal flops it would be a brave shareholder to think Oaktree will come back with a higher offer just to get the deal done. Potentially they will find a way to make a good return on the debt or do a massively dilutive equity raise post the share price crashing with the deal failing. The upside to the funds drumming up support to block it seems less than the downside from an outsider like me.

      In relation to the CEO disappearance, this was of the bidder’s portfolio company so less odd than say of a founding shareholder of the target. It seems like he was an action man surfing, fishing and a generally cool dude that was very popular with surfing gods like Kelly Slater etc. Very sad and random timing to say the least. He went out early on his boat fishing and went missing.

  3. M

    In most transactions of this nature, certain fund managers are going to say things like underwhelmed or not show their cards until the last minute with the hope of putting pressure on the bidder. It’s a dangerous game to play but if they find enough leverage and Oaktree want to move on with combining BBG with Quicksilver potentially they might pay a couple more cents. I think this would be unlikely.

    BBG would have likely been shopped around to most buyers on and off the last 5 years due to the recap. No alternative superior offers have emerged (if they do that’s more upside). The recap (and reason why Oaktree and Centrebridge own large stakes) saved it from going under a few years back. The logical buyer is Oaktree as they can get synergies from Quicksilver. The apparel industry is struggling and the share price will get hammered if the deal doesn’t go through. The funds that are “underwhelmed” would be pretty brave to vote against the deal. Sure, they probably want more and most investors have likely been burnt in recent years holding the stock. The funds that are underwhelmed argue that if December/January trading were strong a higher fair valuation would be needed. BBG has confirmed the expert had access to Dec/Jan trading numbers when preparing the valuation.

    There is also backlash from Ryder Capital at the former BBG (CFO) writing to or calling large shareholders encouraging them to vote in favour of the deal and being paid in the event of a successful takeover. There are inherently potential conflicts with Oaktree being incentivised to buy BBG as cheaply as possible / being a major equity and debt holder. The former CFO writing to shareholders that might trust him on his views of the business (given the CEO is aligned to Oaktree) isn’t that crazy as I’m sure those shareholders would value his thoughts. Given the CFO is being paid on a successful vote he really isn’t independent. Potentially a better way to have paid him was a flat rate regardless of the outcome of the vote. This tells me that Oaktree are desperate to buy this business and move on with their grand plans for Quicksilver.

    Overall, given Centrebridge / Merchant are both on the Board, one founded the business, they both know the market conditions, have access to the latest trading results, hold material stakes and are not in the game of selling out cheap to benefit Oaktree (offer is for cash not scrip). It would be a brave group of investors (with less information than the insiders) willing to try to block this and ride out the short-term pain for a potential higher return.

  4. M

    This deal is heating up with some very aggressive media action from Oaktree linked people suggesting that if certain shareholders try to block the deal the share price will be crushed below $0.50. They also warned that they are key lenders and will pursue that approach as they have a plan B ready to go. It also highlights the millions spent buy Oaktree and 6 months work trying to buy Billabong. Clearly they are desperate to buy BBG one way or another.

    This is pretty aggressive by Oaktree and one can only assume that they are trying to get as much support for the deal to go through before next weeks vote. It also might give Ryder and Adam Smith ammunition to say Oaktree are trying to buy BBG cheap so reject the $1 offer.

    Exciting times!

    Links to articles are below.

    http://www.afr.com/business/retail/clothing-and-accessories/boardriders-leaves-door-open-for-higher-billabong-bid-20180322-h0xv2b

    http://www.afr.com/street-talk/surfs-up-for-renegade-billabong-shareholders-20180320-h0xqxx

    1. dt

      Google for headlines to be able to view these articles.

  5. M

    Quick update – the transaction was easily approved by shareholders today. As an added bonus Oaktree ended up offering an additional $0.05 per share (i.e. $1.05) which possibly was a result of the pressure Ryder and Adam Smith put on them. Congratulations to anyone that benefitted out of this trade. Shares will cease trading April 9th.

    https://www.asx.com.au/asxpdf/20180328/pdf/43ssrsbkt9ljd7.pdf

    1. Vincent

      Thanks for all the comments as well, especially with analysing the statements from Ryder and Adam Smith!

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