Billabong International said Tuesday it would replace Launa Inman, its chief executive, with Scott Olivet, a former chief executive of Oakley. The change came as Billabong said it had secured a financing package from private equity investors worth Australian $395 million (U.S $364 million) to help fund its working capital needs and pay down debt.
Besides Billabong, the company's brands include Element, Von Zipper, Honolua Surf Company, Kustom, Palmers Surf, Xcel, Tigerlily, Sector 9, Dakine and RVCA brands. It also owns Canada's West 49 chain.
The company entered into agreements with a group led by Altamont Capital Partners which will allow Billabong to immediately repay in full its existing syndicated debt facilities. The company has also entered into commitment letters with the Altamont Consortium and GE Capital to provide a long term financing package for Billabong.
The immediate refinancing will be by way of a bridge financing by the Altamont Consortium of the company's existing syndicated debt facilities and the sale of the DaKine brand. The long term financing will be by way of an Altamont Consortium term loan and convertible note, and a revolving credit facility provided by GE Capital. This financing package is intended to provide Billabong with a flexible capital structure to allow it to stabilize the business, address its cost structure, and pursue a strategy to grow the business.
As a condition precedent to this significant investment by the Altamont Consortium, the board of Billabong announced that it intends to appoint Scott Olivet as chief executive officer and managing director of Billabong.
In order to further adequately reflect Altamont's significant investment in the company, Altamont will be permitted to nominate two representatives to the Board of Billabong.
“The board believes that the Altamont Consortium’s refinancing, and the changes being announced today, provide the company with a stable platform and the necessary working capital to continue to address the challenges it faces. We had highlighted the company's debt issues previously and it was imperative to deliver a refinancing that retained an opportunity for shareholders to participate in the future of the company. The Altamont Consortium presented the best available, certain and executable opportunity in these challenging circumstances,” said Billabong Chairman Ian Pollard. “The transaction reflects the Altamont Consortium’s confidence in the value of Billabong’s brands and our company’s ability to achieve future profitable growth.”
Refinancing of syndicated debt facilities and asset sale
Billabong has entered into binding documentation with the Altamont Consortium in relation to a US$294m (A$325m) bridge loan facility (“Bridge Facility”). The Bridge Facility is fully committed and is expected to fund on or around Monday, 22 July 2013. The facility is committed until 31 December 2013, will incur interest of 12.0 percent per annum and is intended to be refinanced by the long term financing described below.
Concurrent with signing the Bridge Facility, the company has entered into binding documentation regarding the sale of DaKine to Altamont for a purchase price of A$70m (“Asset Sale”). The transaction is subject to conditions precedent which are typical for a transaction of this type. The sale is also conditional on the completion of the funding under the Bridge Facility. It is therefore expected that the DaKine transaction will also complete on or around July 22.
As part of the Bridge Facility and the long term financing, Billabong has agreed to issue 84,519,582 options to the Altamont Consortium, amounting to 15 percent of the fully diluted share capital of the company (including the options). The options will be exercisable at the election of the Altamont Consortium at a strike price of A$0.50 per share. The options will be granted in multiple tranches, with the first tranche of options (42,259,790) issued today. The balance of the options are to be issued as part of the long term financing described below. The options will expire seven years from the date of grant of each tranche.
The commitment letter executed with the Altamont Consortium for the long term financing is an exclusive commitment. The commitment letter and the commitments it provides terminate on the earlier of closing of an alternate financing (which would result in the payout of the Bridge Facility by parties other than the Altamont Consortium) and 31 December 2013 (the “Termination Date”). The exclusivity period is for the period until the Termination Date.
During the period of exclusivity, the company and the Altamont Consortium must use commercially reasonable efforts to pursue the long term financing. If the company does not use such efforts and completes an alternate financing on or prior to 15 January 2014, any prepayment or repayment of the Bridge Facility utilising such alternate financing is subject to a premium equal to 20.0 percent of the principal amount of the Bridge Facility. Similarly, if a change of control occurs before 15 January 2014, and as a result the Bridge Facility is repaid on or before 31 December 2013, such repayment will be subject to a premium equal to 20.0 percent of the principal amount of the Bridge Facility.
Long term financing
As noted above, the intended long term financing is to be by way of an Altamont Consortium term loan and convertible note, and a revolving credit facility provided by GE Capital.
Billabong has signed a commitment letter with the Altamont Consortium for a term loan of US$254m (A$281m) (“Term Loan”), made up of a base commitment of US$200m (A$221m) and an upsize commitment of US$54m (A$60m). Proceeds of the Term Loan are to be used to repay the Bridge Facility referred to above. Interest payable on the US$200m base commitment will be 12.0 percent per annum, payable quarterly, of which not less than 7.0 percent must be payable in cash and up to 5.0 percent may be paid in kind (“PIK”). Interest payable on the US$54m upsize commitment will be 10.0 percent per annum, payable quarterly in cash. The Term Loan will have a single financial covenant (in respect of leverage) which will first be tested on 31 December 2014. This is intended to give the company sufficient flexibility to continue implementing its turnaround strategy.
In addition to the Term Loan, Billabong has also signed a commitment letter to issue a US$40m (A$44m) convertible note to the Altamont Consortium (“Convertible Note”). Subject to shareholder approval (described below), the Convertible Note can convert into Redeemable Preference Shares (“RPS”). The interest rate applicable to the Convertible Note will be 12.0 percent per annum, payable quarterly, of which not less than 7.0 percent must be paid in cash and up to 5.0 percent may be PIK interest; however initially and until obtaining shareholder approval for the issue of the RPS and a portion of the options as described below, the interest rate will be 35.0 percent per annum, payable quarterly, of which not less than 10.0 percent must be paid in cash and up to 25.0 percent may be PIK interest. As a result, the company will seek to obtain shareholder approval as soon as possible for the issue of the RPS and such portion of the options.
The RPS will convert to fully paid ordinary shares in the company at a strike price of approximately US$0.213 (A$0.235) per share, representing 25 percent of the fully diluted shares outstanding (including options and the RPS). The dividend rate applicable to the RPS will be 12.0% per annum, payable quarterly, of which not less than 9.0 percent must be paid in cash and up to 3.0 percent may be paid in ordinary shares.
If shareholder approval is obtained before completion of the Term Loan, at the option of the company, RPS can be issued in lieu of the Convertible Note. If shareholder approval is obtained after completion of the Term Loan, the Convertible Note may be converted to RPS at the option of the Altamont Consortium.
Billabong has also agreed to issue the balance of the options to the Altamont Consortium as part of the long term financing. It is expected that 29,581,854 options will be granted on completion of the Term Loan, with the balance of 12,677,938 options issued upon obtaining shareholder approval.
If the Altamont Consortium exercises the options (for cash proceeds of A$42.3 million) and converts the RPS into ordinary shares, the Altamont Consortium’s potential future ownership in Billabong equitycouldbebetween 36.25 percent and 40.49 percent.
Billabong has also signed a commitment with GE Capital for an asset-based multicurrency revolving credit facility of up to US$160m (A$177m) (“Revolving Facility”), subject to holding sufficient eligible accounts receivable and inventory as collateral.
Management and Board changes
Billabong also announces its intention to appoint Scott Olivet as Managing Director and CEO of Billabong. Olivet was formerly Chairman and CEO of Oakley, Inc. and prior to that served as the Vice President, Nike Subsidiaries and New Business Development where he led the portfolio of non-Nike brands, including Converse and Hurley, both of which reported to him. While at Oakley, Scott drove 14 percent compound annual growth in EBITDA and delivered an annualised return to shareholders of 28 percent until its ultimate acquisition by Luxottica. Most recently, he served as Chairman of Collective Brands where he led the company's strategic review and ultimate split/sale of the business. Scott currently serves on the board of Skullcandy, an action sports based electronics and lifestyle company. Scott received a Masters in Business Administration from Stanford University Graduate School of Business and a B.A., Government from Pomona College.
As part of his commitment to the company, Scott has stated that he intends to purchase 11m ordinary shares in the company with the option, at his election, to purchase an additional 4m shares (up to 15m ordinary shares in total). Such purchases will occur on or before the close of business on Friday, 26 July 2013 and before the appointment to his role. Olivet may satisfy these purchases, at his option, by either purchasing shares on the open market or by subscribing for newly issued shares4 from the company at A$0.23 per share. At $0.23 per share, Scott’s total obligation to purchase shares would be A$2.53 million.
As a result of the appointment of Scott Olivet, Launa Inman will step down from her role as Chief Executive Officer and as a director of the company. The company is working with Scott to finalise the terms of appointment to reflect his global experience and a US private equity style package. Such terms will be announced with the finalisation of the transition from Launa to Scott.
“The Board wishes to thank Launa for her contributions to the company and her resilience during the most difficult period in the company’s history,” said Dr. Pollard. “She has shown foresight and direction in the creation of the transformation strategy which has already begun to show some encouraging signs particularly in the USA. It is also timely to recognise publicly the ongoing efforts of the Billabong team globally during a period of significant uncertainty, especially those who have gone above and beyond in the interests of their colleagues, the company and shareholders.”
In order to further adequately reflect Altamont's significant investment in the company, Altamont will be permitted to nominate two representatives to the Board of Billabong. The two representatives are Jesse Rogers and Keoni Schwartz, each of whom will be appointed as additional directors by the Board and will be put forward for election at the next annual general meeting of the company.
Jesse Rogers is a Co-Founder and Managing Director of Altamont. Previously, Mr. Rogers co- founded and was Co-Principal Managing Director of Golden Gate Capital (“GGC”). Prior to co- founding GGC, Mr. Rogers was a long time partner at Bain & company, where he founded and served as the Global Head of Bain’s Private Equity Group. Mr. Rogers is a current or past member of the Board of Directors of a number of public and private companies, including: Beringer Wine Estates, Employer’s Direct Insurance, Endurance Re (observer), Eye Care Centers of America, Herbalife, Interstate National, Lexicon, Rocket Dog, Ruiz Food Products, Tactical Holdings, and TauTona. Mr. Rogers received a Masters in Business Administration from Harvard Business School and a B.A. from Stanford University.
Keoni Schwartz is a Co-Founder and Managing Director of Altamont. Prior to Altamont, Mr. Schwartz was a Principal at GGC, where he completed numerous transactions in the consumer and retail, financial services and technology sectors. In addition, Mr. Schwartz helped to build and manage the firm’s public equities investing activities, working extensively on the firm’s public equity investing vehicle, GGC Public Opportunities. Prior to joining GGC, Mr. Schwartz worked as a consultant in both the Boston and San Francisco offices of Bain & company. Previously, Mr. Schwartz also worked as a consultant for The Bridgespan Group, a consulting firm. Mr. Schwartz received a B.A. in History with honors from Princeton University.
Next steps
As noted above, Billabong intends to convene a meeting of shareholders to approve the issuance to the Altamont Consortium of the RPS and relevant options. Further details of this meeting will be provided as soon as possible, including an information booklet containing an independent expert report.
It is the intention of all the directors to recommend the proposals which require shareholder approval and to vote their own shareholdings in favour of them. Those proposals are:
(a) the issue of the options which exceed the issue limits under the ASX Listing Rules, and the issue of shares on exercise of those options;
(b) the issue of the RPS, and the issue of shares on conversion of the RPS;
(c) the long term incentive components of Scott Olivet’s remuneration; and
(d) the election of Jesse Rogers and Keoni Schwartz as directors at the next AGM.
The directors’ recommendation, and their intention to vote in favour, is subject to the independent expert opining that the issue is fair and reasonable to the company's shareholders and in the absence of any superior proposal.
At the same time as preparing the materials for the shareholder meeting, Billabong will be working with the Altamont Consortium and GE Capital to agree binding documentation for the Term Loan, Convertible Note and Revolving Facility as soon as possible.
