Quiksilver Inc.’s problems reached a much scarier level on Halloween after the company revealed that it would have to sell Rossignol at a significant discount to its formerly agreed-upon price. The surf giant also revealed that it had hired Morgan Stanley to look at raising money, including from existing lenders and through a stock sale.
It also said that “in light of the current turmoil in the global capital markets,” it had expanded its review to include “private equity investment capital and other strategic alternatives.” Market speculation ensued that this could lead to the sale of parts or all of the company.
Under the new terms of restructured Rossignol deal, Quiksilver will sell the business for $52 million, down from $130 million when the deal was struck in August.
Under the new terms of restructured Rossignol deal, Quiksilver will sell the business for $52 million, down from $130 million when the deal was struck in August.
Quiksilver bought the French maker of skis, snowboards and related gear for $560 million in 2005. The lower sale price will cause ZQK to absorb a larger charge from the sale of Rossignol, although the company gave no estimates. With financing in place, the deal’s completion still requires European labor union approval and other usual closing conditions, but Quiksilver expects to close the transaction in early November.
“In this time of unprecedented challenge in the global credit markets, price concessions were required to achieve a final sale of Rossignol,” said Robert McKnight, Jr., chairman, president and CEO of Quiksilver, Inc. “We remain convinced that the timely close of this transaction is in the best interest of Quiksilver’s stakeholders and we look forward to completing the sale in early November. Im delighted that we can now fully concentrate our efforts on our core apparel and footwear brands Quiksilver, Roxy and DC.”
Under the revised terms of the deal, Quiksilver will sell Rossignol apparel through winter, which is expected to bring in between $6.5 million to $13 million in additional sales. Quiksilver also has an option to license the Rossignol name for apparel beyond winter.
On the brighter side, Quiksilver secured an amendment to its 70 million credit line in Europe that is due to mature on October 31. Under the amended terms, Quiksilver reimbursed its European bank group 15 million on October 31, with the remaining 55 million extended until March 14. Quiksilver expects to have approximately $100 million of available liquidity after the close of the Rossignol sale.
Regarding business trends, Quiksilver said it expects to achieve the consensus analyst estimates for the year, calling for income from continuing operations of 87 cents per share for fiscal 2008, excluding potential charges from the Rossignol sale. Shares of Quiksilver closed at $2.59, up 8 cents, on Friday as some investors had feared the buyer, Chartreuse & Mont Blanc, and its financial backers wouldnt be able to pull the deal off. Australias Macquarie Group Ltd. is the majority owner of Chartreuse & Mont Blanc, headed by former Rossignol CEO Bruno Cercley. Jarden Corp. is a minority investor in Chartreuse & Mont Blanc.
But analysts agreed that Quiksilver remains in dire need of a capital infusion, regardless of whether they received the originally-agreed upon price for Rossignol or the new lower price. Jim Duffy, an analyst at Thomas Weisel Partners, sees a few options for the company. The first would be to restructure its debt, which has been a challenge given the current credit market and will likely be expensive. “Hopefully with Rossignol off their books, theyll be in a better position to restructure some of the outstanding debt, particularly in the European business,” said Duffy in a report.
A second option is selling a stake in the company to a private equity fund if the credit markets are available. This option would enable Quiksilver management to secure capital to reinvest and improve the business to generate cash flow and reduce debt while waiting for business conditions to improve.
A third option would be a sale of a component of the business. Duffy believes the sale of DC would bring in the most value, because its the brand with the most growth opportunities. But he added that management essentially would be “giving up the most exciting piece of the puzzle.”
For existing equity shareholders, Duffy believes the best option might be an outright sale of the company. The buyer would most likely pay a much higher premium to a private equity deal. Furthermore, the debt markets “are going to be fairly unfavorable and theyll need to work their way through what could be a very difficult year.”
In particular, the European business, which accounts for roughly half of Quiksilver’s overall operating profit, is expected to be impacted by the strengthening U.S. dollar and a slowdown in European economies. Still, with $1.1 billion in debt, Duffy doesnt expect a huge premium from a buyer and he said only a few companies would be able to tackle the acquisition. “It wouldnt be a small acquisition and the buyer would still have a lot of work to do to improve operations,” he said.
Other market observers speculated that only Nike, Inc. or VF Corp. could absorb Quiksilver. Jeff Mintz, who covers ZQK for Wedbush Investment, is also not sure whether an outright sale is the best option. Although Morgan Stanley might explore interest in a deal for all or some of the company, management would be unlikely to sell the company at the currently depressed levels. The stock’s 52-week high is $13.47 and the stock was trading in the 30s when ZQK acquired Rossi three years ago. Mintz augured investors could wind up getting a better payback if the company finds a way to survive its debt crisis.
“There’s nothing wrong with the Quiksilver, Roxy and DC brands,” said Mintz. “Once they get rid of Rossignol, they can revamp their business model. So if youre a long-term shareholder, you might want to see them getting some funding and kind of turning the business around and over time achieving better results.”
Nonetheless, he agreed that the company “definitely needs to find some other sources of capital.” If a debt deal is unavailable, he believes management might prefer selling a stake to private equity, which could include preferred equity to make it less dilutive to existing shareholders. “Just something to give then some breathing room because it’s not easy to get credit in this environment,” said Mintz.
