INTRODUCTION AND CONTEXT
Billabong International Limited's under performing business and increasing net debt are well documented. Over the past year and a half, Billabong has received a number of refinancing proposals, each of which appeared less favourable than the last. In July 2013, Billabong announced that it had accepted the Altamontled consortium's refinancing proposal, which had the following interesting features:
- Termination fee of approximately 54% of Billabong's equity value, triggered by a change of control;
- Make-whole premium of approximately $107 million, triggered by a change of control; and
- 35% pa interest rate on convertible note, which decreased to 12% pa, if shareholders approve conversion to redeemable preference shares.
SUMMARY
In the absence of rectifying action, the Takeovers Panel would have declared that the refinancing package proposed by Altamont (in particular the penalty payments in the refinancing package and their excessive coercive effect on Billabong shareholders) infringed on takeovers law by locking out other potential proposals therefore giving rise to unacceptable circumstances.
THE PANEL'S DECISION
The termination fee, make-whole premium and variable interest rate were lock-up devices, the effect of which was to discourage rival bids, and inhibit the acquisition of voting shares taking place in an efficient, competitive and informed market. In particular, the Panel found that:
- Both the termination fee and the make-whole premium amounted to a 'break fee', which should ordinarily not exceed 1% of the equity or enterprise value of the target.
- Trigger of the break fees by a change of control potentially hinders another actual or potential control transaction.
- Variable interest rate, triggered by the absence of shareholder approval, amounted to a "naked no vote" break fee.
- The magnitude of the break fee constituted a financial penalty on Billabong, As Billabong was in financial distress and the shareholders would feel pressured to approve the transaction, the trigger was
- deemed unreasonable.
OUTCOME
Billabong and Altamont revised the refinancing package by:
- Reducing the termination fee to under 1% of Billabong's enterprise value, and removing the change of control trigger.
- Reducing the make-whole premium to 1% of the principal amount.
- Removing the "naked no vote break fee".
As a result of the restructure, the underlying cost of the refinancing package increased. Interestingly, Oaktree and Centrebridge, who challenged Altamont's refinancing proposal, pitched a rival package which was accepted by Billabong in September 2013.
TAKE AWAY
There is no issue with "loan-to-own" transactions in the Australian market, which are usually begrudgingly approved by shareholders. However, refinancing terms that have the effect of "pre-packaging" the outcome before shareholders have the opportunity to vote, risks drawing the Panel's attention and action.
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