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Oaktree-owned Quiksilver and Billabong could be sold as owner Boardriders seeks to deal with debts

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Boardriders chief executive Arne Arens declined to comment on any pending transaction, but confirmed the private equity owners are mulling a sale after receiving interest from several possible buyers of Boardriders.

“We have, and we also continue to evaluate the inbound interest from multiple parties,” the Dutch national and former Nike executive told AFR Weekend.

He confirmed there are no current plans by Oaktree to sell off any smaller brands like DC Shoes, but declined to say if regional licensing deals are being considered by its owners.

Selling assets

Boardriders has been closing unprofitable company-owned stores, but makes most of its sales from wholesale customers and has a growing online business.

It has also been selling assets: in October it offloaded Billabong’s beachfront house on the North Shore of Oahu at Pipeline. In 2019, IP Generation purchased the former Quiksilver headquarters in Torquay from Boardriders for an estimated $15 million. It also sold and leased back its Burleigh Heads office (formerly Billabong HQ) that same year.

Oaktree, which has $US163 billion ($256 billion) in assets under management, is best known as a vulture fund that has been involved in several other high-profile Australian recapitalisations, including Nine Entertainment (publisher of AFR Weekend) and Blue Sky Asset Management.

Mr Arens took the helm in March 2021 from Dave Tanner, the former head of California-based Oaktree’s special situations team. Mr. Tanner remains a significant investor and board member at Boardriders.

Shannon North, who worked at Billabong for over 25 years, left in April while Garry Wall, the former MD of Quiksilver, exited in September 2021 after three decades with the business.

Howard Marks, co-founder and co-chairman of Oaktree Capital Management, is mulling a sale of Boardriders. Louise Kennerley

One surf industry source said there are two ways to look at senior exits and layoffs: either “it’s necessary – or it’s preparing for its next chapter under a different structure.”

Multiple sources speculated that possible buyers are likely private equity, although with cheap financing days now over and investment committees worried about the economic backdrop, they would all be looking for cheap deals.

“Strategic (owners) would stay clear, it’s an obvious play for a licensing company too,” said one industry source.

Mr Arens does not expect to have to cut jobs deeply in the future, and said the recent cuts were aimed at putting the company in a better position ahead of expected “rough weather” next year, noting the macroeconomic backdrop of rising interest rates; sky-high inflation and falling consumer sentiment.

“We’re looking at consumers starting to pull back a little bit on their discretionary spending. Although the recent changes we made were difficult, it’s only prudent as a company and as a leadership team, to be ahead of the curve and make sure that we are diligent in the way that we manage our cost structure,” he said.

Mr Arens added segments of the company’s cost structure are coming down after a tough year of battling surging freight and higher fuel costs, as well as higher inputs for products like board shorts and wetsuits.

Boardriders suffered amid COVID, as did many global retailers, with supply chain and inventory bottlenecks in the last 24 months, but Mr Arens said he is comfortable with inventory levels in the US and Australia.

He was confident about driving more full-priced sales throughout the holiday season, but conceded some US consumers are looking for discounts and the brands have to remain competitive.

Boardriders’ top-line sales for the 2021 financial year grew 20 per cent to $US1.62 billion. Revenue growth is likely to slow to low double digits in the 2022 financial year ended October 31 and reach nearly $US1.8 billion.

Mr Arens said people starting to travel again to key markets like Florida and Hawaii and price increases have helped to mitigate some cost increases pressuring gross margin over the year.

Negative outlook

But S&P Global analyst Amanda O’Neill said Boardriders’ capital structure and its indebtedness are her biggest concerns. She has forecast a leverage ratio at 10 times in fiscal 2022, and believes Boardriders must address a $US50 million senior term loan maturity to avoid default.

While top-line sales are growing, the company is barely generating enough earnings to cover interest payments, and unpaid preferred stock dividends are also accumulating (being treated as debt), which are also concerns.

“Companies with unsustainable capital structures may explore a sale, so it wouldn’t be surprising if this option was being considered,” she said from New York.

“They are rated ‘CCC’ with a negative outlook, and that’s one of our very low rating levels where we’re saying we envision a default in 12 months. So getting a straight refinancing done at that rating level can be quite challenging.”

Ms O’Neill flagged the challenges of store closures in Australia and other surf areas and towns amid the pandemic, which made Boardriders recovery “cheapier” than other major apparel and footwear companies.

On the positive side, the group’s brands still have a place with their core demographic and travel slowly returning also bodes in Boardriders’ favor, she said.

Owner Oaktree is also a senior term lender, along with others. This could mean negotiations with debt holders may be somewhat favorable to the company because it is not in the owner’s interest to enforce creditor rights, which could threaten their own control, Ms O’Neill said.

Mr Arens declined to comment on refinancing risks facing the company saying that the board is very focused on this issue. Oaktree is also entangled in a court case related to a $110 million 2020 debt transaction.

A judge on October ruled that the suit that claims some lenders to Boardriders in this financing deal unfairly benefitted other creditors, and Oaktree.

As Australia heads into the peak selling summer period, customers are snapping up wetsuits, swimwear and board shorts, despite the company increasing pricing by up to 9 per cent in some categories.

Boardriders Asia Pacific boss Greg Healy warned discretionary spending is likely to contract as consumers face a squeeze on household budgets after multiple rate hikes and inflation persists in everyday items like groceries.

However, he added rates of domestic travel bookings continue to be strong, and was confident that customers would be drawn to the brands and the high quality of the product offer.

“Our mainstay brands of Quiksilver, Billabong and Roxy are in really good shape. Our forward order books are looking solid,” he said.

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