Billabong International Ltd

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Completed as part of the requirements for ‘Corporate Finance’, 25765

1.0 Introduction1
2.0 Executive Summary1
3.0 Capital Structure2
3.1 Types of Funding Utilised by Billabong3
3.2 Recent trend in the level of leverage3
3.3 Capital expenditure and financing:5
3.4 Capital Structure of Similar Firms6
3.5 Company Characteristics and Leverage policy7
3.5.1 Taxes8
3.5.2 Trade off Model8
3.5.3 Pecking Order of Financing Choices9
3.5.4 Signalling Theory9
3.6 Optimal Capital Structure10
4.0 Dividend Policy10
4.1 Billabong dividend history11
4.1.1 Lintner’s Stylised Facts & Clientele Effects12
4.2 Similar firms Dividend Analysis13
4.3 Relative Comparison of Billabong Dividend Policy to similar firms14 4.4 Relationship Between the Company’s Characteristics and Dividend Policy15 4.5 Alternatives to Dividend Payments16
4.6 Optimal Dividend Policy16
5.0 Valuation18
5.1 Weighted Average Cost of Capital (WACC)20
5.2 Estimation of Share Price23
5.3 Sensitivity Analysis25
5.4 Comparison between the calculated and actual share price28 5.5 Investment Decision28
6.0 References29
7.0 Appendix30
1.0 Introduction

Company Overview

Billabong was formed in Queensland (1973) by a current non executive director Gordon Merchant. After consolidating its operations in Australia in the 1970s, Billabong expanded its distribution overseas to include Japan, the USA and Europe during the 1980s. In 1998, a consortium acquired a 49% interest in Billabong, allowing the firm to convert its licensed US operations to a directly controlled operation. Direct control was similarly established in NZ, Canada and Europe. BBG listed on the Australian Securities Exchange (ASX) in August 2000. The stock code is BBG.ASX and formal name is Billabong International Limited. BBG corporate website is, BBG market capitalisation is AUD $2,955 million and its equivalent shares is 252 million ( Investsmart 2010)

Brands: BBG brands include: Billabong (BBG flagship brand), Element, Von Zipper, Honolua, Nixon, Xcel and Tiger lily (Finance Yahoo 2010)

Sales and Marketing: Brands are marketed and promoted through associations with high profile athletes, junior athletes and events around the world. BBG products are sold in more than 60 countries by its directly controlled operations in Australia, New Zealand, North America, Europe, Japan and Brazil and through licensed operations and distributors in other regions. (Finance Yahoo 2010)

Major Customers The majority of revenue is generated from wholesale sales to independent retailers. BBG products are sold to around 2,600 surf and extreme sport shops worldwide. In Australia, over 30% of sales are made from BBG 10 largest customers. In North America, market leader Pacific Sunwear sells BBG products. In Europe, the customer base is highly fragmented. (Investsmart 2010)

Acquisitions: In August 2008 BBG entered into an agreement to acquire DaKine Hawaii, a business operating in the premium accessories category within the surf, skate, snow and windsurf markets. In July 2008 BBG acquired Sector 9, a US based skateboard brand specialising in skate long-boards (Finance Yahoo 2010)

2.0 Executive Summary:

Billabong is a levered firm that has a sound combination of debt and equity, the firm is perceived to focus on maintaining close to an optimal capital structure that maximises shareholder value. The firm’s Debt-to-Equity have remained at a steady level as in 2009 has shown a slight decrease at 47.40% after a trend of continuous increase from 2005 to 2008, which shows Billabong has a target level.

Over the past periods of 2005 to 2009 Billabong has continuously increased its debt level while at the same time its equity has continuously increased at a much faster rate. This clearly demonstrates that the company has taken the advantage of tax benefits and at the same time ensure its risk of potential...
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