Although Billabong has gone through an extensive sales process and faces "an urgent need for funds," the Takeover's Panel has not allowed the company to lock itself up in a way that would deter rival proposals or pressure shareholders into accepting a refinancing "rescue" package.
Debt for equity restructurings are not immune from the Takeovers Panel's reach. Even in circumstances where there may be little economic value left for shareholders, listed companies, lenders, hedge funds and private equity players need to be conscious of the takeover provisions and Panel guidance when considering refinancing and restructuring arrangements that have potential control effects.
The Panel's decision is a reminder that companies considering financial restructurings must balance the commercial need for funds and a desire for certainty with the shareholder protections underlying Australian takeover law and practice.
PANEL CHALLENGE – ANTI-COMPETITIVE AND COERCIVE
Billabong has seen a lot of action in the last 18 months. This story has it all: a series of acquisition proposals from no fewer than four private equity groups, each at increasingly lower indicative offer prices; a rescue package in the form of a refinancing proposal from private equity firm Altamont and hedge fund GSO Capital (the "Altamont Consortium"); a challenge in the Takeovers Panel by hedge funds Centerbridge Partners and Oaktree Capital Management who claimed the proposal by the Altamont Consortium was "anti-competitive and coercive"; and now, following the Panel's decision and with the "unacceptable" hurdles to a rival proposal removed, Billabong is once again back in play.
Centrebridge and Oaktree acquired their debt position (which was the subject of the Altamont Consortium refinancing) via the secondary debt market where all original senior lenders sold their debt positions in the mid-80 cents to low 90 cents in the dollar.
While being taken out at par in such a short timeframe would seem an excellent outcome for Centerbridge and Oaktree, it seems the implementation of a "loan-to-own" strategy was the ultimate goal rather than deploying their funds for simple short-term gains.
Billabong and the Altamont Consortium have avoided a declaration of unacceptable circumstances by amending certain provisions of the original refinancing arrangements that the Panel considered coercive to Billabong shareholders and likely to have the effect of deterring rival proposals, including:
- A termination fee of 20% of the principal amount under a bridge facility, and a significant "make-whole" premium for early repayment of the long term financing – both of which were payable if there was a change of control of Billabong.
- An interest rate on the long term financing (parts of which were subject to shareholder approval) of 35% if shareholder approval was not obtained, but only 12% if that approval was given.
Panel guidance indicates that break fees in excess of 1% of equity value may have the effect of putting pressure on shareholders to accept a bid or locking out a potential competitor. In this case, (where the fee equated to 54% of the equity value of Billabong prior to the announcement of the transactions with the Altamont Consortium) the Panel considered the size of the termination fee, the "make–whole" premium, and the circumstances in which they were payable would have the effect of deterring rival proposals. ASIC noted "a $65 million penalty payment arising in the event of a change of control would serve to deter any reasonable third party seeking to table an alternative proposal". 1
Similarly, the Panel considered the magnitude of the 35% interest rate and the circumstances under which it was payable was likely to coerce Billabong shareholders to approve the financing arrangements (which involved the issue of a controlling interest in Billabong). The Panel noted that these provisions amounted to a "naked no vote" break fee.
"Naked no vote" break fees are not of themselves unacceptable, and courts in the context of schemes of arrangement have previously approved such break fee triggers 2. In these instances the courts have suggested that such fees must not be "so large as to be likely to coerce shareholders into agreeing to the scheme, rather than assessing the offer on its merits." 3
In the Billabong decision, however, the Panel has taken the view that the magnitude of the 35% interest rate was so large that it was "likely to substantially coerce shareholders into approving [the transaction]".
HOW LONG MUST A COMPANY KEEP ITSELF IN PLAY?
There is no positive duty on Australian directors to actively conduct an auction, put the company in play or engage with every potential bidder. However, the Panel is concerned to ensure that the market for control is preserved and is not unduly restricted by unacceptable levels of deal protection. Lock-up devices should not operate to "chill" the contest for control completely. 4
There have been various media reports alluding to the Billabong directors' "duty" to consider the revised Centrebridge and Oaktree proposal. Consistent with past decisions, the Panel has steered clear of considering directors duties as part of its analysis. In considering lock-up devices, the Panel instead focuses on the acquisition of a substantial interest in a company taking place in an efficient, competitive and informed market.
Whether or not a target has conducted a public sales process is one factor the Panel will look at in considering whether a lock-up arrangement is unacceptable. However, a public sales process – even one as extensive and prolonged as in Billabong – is not a safe harbour that allows a target to shut down the contest for control. The challenge by Centerbridge and Oaktree suggests that the sales process had not yet run its course, and the Panel was concerned to ensure that alternative bidders emerging at a late stage were not deterred from competing.
Understandably, deal fatigue may have well and truly set in at Billabong, and the prospect of continuing uncertainty and delays would be unappealing. Billabong has indicated that being put back in play may not necessarily be in the best interests of the company, with a spokesperson saying: "Shareholders need certainty if we are going to rebuild Billabong and at the moment it is about finding the fastest path to certainty... Is it really going to benefit the business and the 6000 people employed globally to go through another six months of due diligence, management discussions and the like? This also has costs." 5
Billabong is looking for some certainty, but the Panel decision shows that such certainty cannot come at the cost of shutting out competition. In requiring changes to its terms, the Panel has allowed the current Altamont Consortium deal to remain on foot, while opening the door for potentially superior proposals to be put forward.
Whether or not Billabong engages in relation to the new proposal remains a matter for its board. However, whatever the outcome, the revised proposal from Centerbridge and Oaktree will now form part of the shareholder's decision making process.
AND SO THE BATTLE CONTINUES...
The story has certainly not ended yet. The removal of the onerous deal protection provisions has put Billabong back on the table for counter-offers. Indeed, no sooner had the Panel's decision been announced than Centerbridge and Oaktree released the terms of their alternative proposal.
At the time of writing, Billabong had announced that "it appropriately evaluated all proposals over the past 18 months and that the Centerbridge proposal will be no different."
However, Centerbridge and Oaktree may face an uphill battle. While the Panel is a relatively quick forum for dispute resolution, the time it has taken to remove the "unacceptable" deal protections provisions may favour the incumbent Altamont Consortium proposal.
Since Centerbridge and Oaktree made the application to the Panel, Billabong has sold its DaKine business to Altamont, has drawn down on its bridge facility to repay its syndicated debt facility and is in the process of appointing a new CEO.
And so it continues - Not only does Billabong have two separate proposals to consider, but activist hedge fund Coastal Capital (of Alinta fame) has also built a 5% stake in the company which suggests that the action may be far from over.
1Billabong International Limited  ATP 9 at 31
2Bolnisi Gold NL  FCA 1668 at -, Rusina Mining NL  FCA 517 at -, Re Rural Press Ltd  FCA 314
3Bolnisi Gold NL (No. 2)  FCA 2078 at 
4For further discussion see "The duty to auction: Real or imagined?" Andrew Lumsden and Saul Friedman (2012) 30 C&SLJ 493
5Matt Chambers, 'Billabong unswayed by demand to study bid', The Australian, 26 August 2013
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