Rossignol continues to haunt Huntington Beach-based Quiksilver Inc., even after the company unloaded the struggling ski business in a fire sale last month.
Debt from 2005’s $560 million buy of Rossignol and more recent borrowing to keep the operation going is weighing heavily on Quiksilver, according to analysts who follow the company.
If Quiksilver can’t raise money to pay down debt, the No. 1 maker of clothes inspired by surfing and skateboarding could face the prospect of selling itself or worse, they say.
“Given the level of debt, bankruptcy is a possibility,” said Jeff Mintz, an analyst with Los Angeles-based Wedbush Morgan Securities. “We can’t completely rule it out given how much debt they have.”
Quiksilver declined to comment for this story.
Not all analysts are as dire.
Some are encouraged by the shedding of Rossignol and Quiksilver’s recent reworking of a $90 million European credit line. The company’s clothes are holding up better than others’ in the worst retail downturn in recent memory, they say.
But none deny Quiksilver faces major challenges that could end up reshaping the company.
Quiksilver has hired Morgan Stanley to help it raise money, possibly by expanding borrowing with existing lenders or by selling shares to investors or a private equity firm.
The attempt to raise money during the financial crisis speaks to the severity of Quiksilver’s situation. It is set to pay more to borrow or give away more (if not all) of the company to investors than it would have just a few months ago.
That’s if Quiksilver can pull off a financing deal at all.
“There’s tightness in all areas of finance right now,” Mintz said. “It’s difficult to get anyone to put money on risk. Given how much debt they have, it’s difficult to see how they would structure a deal with a private equity group.”
Rossignol Sale
The Rossignol sale has proven a mixed blessing for Quiksilver.
Analysts and investors pushed for a sale as Rossignol brought losses to Quiksilver for the past three years. The vision of broadening Quiksilver into a major seller of clothes and sporting equipment never realized, despite the company’s efforts to fix Rossignol, which was losing money and market share before it was acquired.
The sale is “an incremental positive for Quiksilver as it will remove one of the overhangs on the shares,” Piper Jaffray & Co. analyst Jeff Klinefelter wrote in a recent report.
Shares of Quiksilver are down 90% for the year with a recent market value of about $170 million.
But Quiksilver ended up selling Rossignol for $50 million, 40% of what it had hoped to get in August and a fraction of what it paid in 2005.
Quiksilver sold the business to Chartreuse & Mont Blanc, made up of a former Rossignol executive, Australia’s Macquarie Group Ltd. and Rye, N.Y., outdoor products maker Jarden Corp.
The proceeds aren’t enough to make a dent in Quiksilver’s $1 billion in long- and short-term debt as of July 31. (Quiksilver is set to report results for the three months through October on Dec. 18.)
After the Rossignol sale, the company said it has $100 million in cash and equivalents.
Last month, Moody’s Corp. downgraded Quiksilver’s overall credit rating and probability of default to a further level of speculative or junk bond status.
Before Quiksilver’s sale of Rossignol, the company used short-term borrowing to ready the ski unit for the winter season, according to Moody’s.
The proceeds from the Rossignol sale aren’t enough to cover the recently incurred debt, Moody’s said.
Quiksilver’s debt crunch comes as the company is weathering a slowdown in sales of clothes at malls, boutiques and at its own stores.
“When you go into a consumer slowdown, the debt is really what can kill you,” analyst Mintz said. “If you don’t have debt, you can handle sales slowing.”
Quiksilver’s credit lines are due for renewal in 2009, according to Mintz.
Up for Sale?
If Quiksilver continues down the path it’s on, the company could have to put itself up for sale, he said.
“There’s a possibility that they could get acquired if things get worse,” Mintz said. “With an encumbered balance sheet, the need to do something becomes stronger.”
Quiksilver’s high debt could deter all but the biggest potential buyers. Its iconic Quiksilver and Roxy brands would be attractive to big apparel makers looking to expand into the tight-knit market of surf and skate clothes.
One potential suitor could be North Carolina’s VF Corp., which owns surf and skate clothing companies Vans Inc. of Cypress and Reef Holdings Corp. of Carlsbad.
VF had a recent market value of more than $5 billion and generates yearly sales of about $7 billion.
Nike Inc., which tried for years to crack the surfwear market before buying Costa Mesa’s Hurley International LLC in 2002, could be another possible buyer.
The upside for Quiksilver is that its clothes may be “holding their own” in a weak economy, Robert W. Baird & Co. analyst Mitch Kummetz wrote in a recent report.
Still, the critical holiday selling season is proving to be tricky for Quiksilver and others, with many analysts predicting a decline or flat consumer spending at best.
Along with raising money, Quiksilver will have to focus on cutting costs to deal with its debt, Mintz said.
“The key thing is to cut costs,” he said. “They have to figure out a way to reduce the costs such that they can handle the debt until things start to improve.”
