Deals: Goodman Stalked: Billabong Rejects

Singapore-based palm oil producer Wilmar International (SP: WIL) has emerged as the latest company to get excited about one of the least attractive companies on the ASX, Goodman Fielder (ASX: GFF).

Goodman Fielder is a barely profitable, indebted struggling group that is still our largest locally owned food company, but which has found many ways of not being able to capitalise on that potential over the years.

And the past year has been typical with huge write-downs, losses in the key bread division, weak sales elsewhere, a botched management change and now a tough market place with major retailers looking to boost their own label business at the expense of brand makers like Goodman Fielder.

Goodman Fielder yesterday confirmed to the market that Wilmar is trying to build a 10% in the breads and spreads manufacturer. It already holds 5%. Wilmar later built the stake to 10.1%.

"Goodman Fielder has not received any proposals to acquire Goodman Fielder from Wilmar or any other party," Goodman Fielder said in a statement.

Swiss bank UBS (NYSE: UBS) had offered up to 60c a share for up to 10% of Goodman Fielder shares on Monday night.

New Zealand billionaire Graeme Hart, who floated Goodman Fielder several years ago after raiding and taking over, was mentioned in the list of usual suspects. But he was then ruled out.

The offer price of 60c was a 16.5% premium to Goodman's closing price of 51.5c a share on Monday.

At 60c a share, the 10% stake would be worth $117 million and would value Goodman at $1.117 billion.

But with $770 million in debt, the company's real acquisition value is closer to $1.9 billion.

Goodman Fielder is struggling, as the profit report for the December half year confirmed.

It suffered a 77% drop in interim net profit after tax to $21.5 million as the new management team led by CEO Chris Delaney tried to turn the company around by cutting costs and spending more on key brands.

That has all been tried before, to no real success.

One part of the strategy is to sell the commercial oils and fats business, which is what Wilmar may be really interested in.

That could get $240 million in a sale.

Back in 2009, Cargill the US agri trading giant wanted to buy the fats and oils business, but was blocked by the competition regulator, the ACCC.

Goodman makes well-known Australian brands including Pampas, Meadow Lea, ETA, Cornwell's, White Wings and breads including Mighty Soft and Wonder White.

It suffered heavy losses last year when it lost a private label bread contract for a leading supermarket chain and took a $300 million write-down in the division's Australian and NZ business.

A full foreign takeover bid would face scrutiny from the Foreign Investment Review Board.

Wilmar bought Australia's largest sugar miller, CSR's Sucrogen, in 2010 for $1.75 billion and last year took over Proserpine Sugar Co-operative for $120 million.

Goodman Fielder shares closed at 68.5c yesterday, up 17c or 34%.

All optimists, everyone of them, if they think there will be a bidding war for this fading giant.

And the brief flirtation between underperforming surfwear maker and retailer Billabong and US buyout group TPG Capital has ended. Billabong yesterday rejected an increased offer by the private equity group saying it ''still does not reflect the fundamental value of the company in the context of a change in control''.

TPG lifted its indicative offer to $3.30 a share from $3, but that failed to win over the board who had earlier received a letter from founder and largest shareholder Gordon Merchant opposing the TPG approach.

Merchant, along with fellow director Colette Paull, in fact rejected any move by the board to facilitate the bid even if TPG lifted the price to $4 a share to facilitate due diligence.

The two sent a letter to their fellow directors on Monday evening stating that they do not support Billabong taking any steps to assist or facilitate a proposal by TPG Capital even if it offered $4 per share to facilitate due diligence.

After being advised of the letter from Mr Merchant and Ms Paull, TPG said it was prepared to raise its offer from $3 a share to $3.30 to facilitate due diligence, according to yesterday's statement from Billabong.

The board determined the bid to be inadequate and Billabong said discussions between the two parties have ceased.

"However, the board is prepared to engage with TPG or any other party that makes a proposal which is in the best interest of the company and its shareholders," the company said.

The announcement news came just one day after the board rejected TPG's $3 per share offer.

Billabong shares were trading above $4 in December when the company unveiled a shock earnings downgrade that led analysts and investors to question the company's strategy to set up its own retail business.

The stock was trading above $8 a year ago this month.

Earlier this month the company revealed a restructuring which will involve closing hundreds of stores around the world and selling part of its Nixon brand into a joint venture with another private equity group.

The Nixon proposal will see Billabong (ASX: BBG) and Trilantic Capital Partners each hold approximately 48.5% of Nixon, a leading brand in the global youth accessory market, and management will purchase the remaining 3% stake.

Billabong said it expects to realise net proceeds of approximately US$285 million as a result of this transaction, all of which will be used to repay debt.

The transaction values Nixon at approximately US$464 million, Billabong said

"As a result of the strategic capital structure review which includes planned cost saving initiatives, the company is now on a much more secure footing and is well-positioned to grow and create value for shareholders," Billabong's board said yesterday.

The shares fell 7c to $2.98, a loss of 2%.

The shares were down more after the rejection was announced, but rose as punters speculated TPG might go hostile.

Comment: Gordon Merchant controls 16% of Billabong's capital and speaks for a total of around 20% with support from other shareholders.

His refusal to sell below $4 means private equity groups will struggle to do a deal because they won't be able to see a way of making money.

So talk of KKR and Blackstone, which are reported to be looking at bidding, look fanciful, especially as media reports suggest they have already been sent packing once by company management, along with Bain and Pacific Equity Partners.

Mr Merchant is the blocking stake and is now tipped by some reports, to be preparing to resume a more active role in the company's management, with changes on the board and among senior executives tipped to happen in the near future.

The problem for TPG and others is that the Nixon deal means Billabong doesn't need to talk to private equity, it has its own deal and one that doesn't threaten the company.

It will allow debt to be cut, stores to be closed and other changes made. Mr Merchant's opposition to a bid means the company has time to change, and there's time to change the management and the board.