Quiksilver Inc. could emerge from bankruptcy with separate ownership for its domestic and overseas operations.
The Huntington Beach-based apparel manufacturer and retailer has been moving toward a two-headed operational structure for some time, and its bankruptcy filing last week emphasized that direction. It listed Huntington Beach as its “global corporate headquarters,” with Saint-Jean-de-Luz in France as the company’s “global operational headquarters.”
Quiksilver’s footwear is created by its design and merchandising teams in Huntington Beach, while its apparel and accessories come from teams in France.
The move to reorganize under bankruptcy protection points to the potential for a formal split in ownership, with Los Angeles-based private equity firm Oaktree Capital Management LP set to take a majority stake in 10 U.S.-based subsidiaries named as debtors in the filing. Quiksilver’s businesses in Europe and the Asia-Pacific region—more than 70 entities that handle everything from swimsuits to surfboards everywhere from Switzerland to South Africa—are not part of the filing.
The operations outside the U.S. accounted for 66% of the $1.57 billion in total revenue for the fiscal year ended in October and “remain strong,” according to Quiksilver.
“When you’re doing reorganization, you only want to file for entities that are having problems,” said Evan Smiley, partner at Smiley Wang-Ekvall LLP, a Costa Mesa-based law firm that specializes in insolvency and business litigation. “What’s clear here is the U.S. operations are the ones that are suffering the most and where there is the real need for liquidity.”
US Roster
The U.S. roster includes QS Wholesale Inc., QS Optics Inc., DC Shoes Inc., Hawk Designs Inc. and QS Retail Inc., among others.
Quiksilver recently trimmed operations in several waves of layoffs in Huntington Beach, consolidated its headquarters space, and moved some of its warehousing operations to a distribution center in the Inland Empire. Last week brought word of plans to shut down at least 27 of its 122 domestic stores.
Quiksilver is listed as a holding company and direct parent of QS Wholesale, which in turn is the direct parent of each of the remaining debtors, according to court documents. Day-to-day U.S. operations are managed by QS Wholesale and QS Retail, which oversee manufacturing operations and the company’s stores.
Quiksilver reported $337 million in assets and $826 million in debt, including $279 million in U.S. secured notes—the majority of which are held by Oaktree.
Oaktree has been working with Quiksilver since August to “negotiate the terms of a potential plan of reorganization,” according to court documents.
The investor is set to gain a controlling interest in all 10 of Quiksilver’s U.S.-based entities by converting the secured notes “into equity of the reorganized debtors,” said Andrew Bruenjes, chief financial officer for Quiksilver’s Americas division, in an affidavit filed with the U.S. Bankruptcy Court.
Oaktree, which has more than $100 billion in assets under management, also owns a majority stake in Australia-based Billabong International Ltd., a competitor of Quiksilver. The investor plans to join with Bank of America to provide $175 million in debtor-in-possession financing to Quiksilver.
The ownership split, meanwhile, may be easier said than done.
Quiksilver’s debt includes a guarantee on a loan that benefited its overseas subsidiaries, a matter that had to be addressed in the agreement with Oaktree. The deal includes a reinstatement of guarantees on about $224 million worth of European unsecured notes, which Deutsche Bank AG issued to Quiksilver affiliate Boardriders SA in Luxembourg. The debt, partially owned by Oaktree, will continue to be guaranteed by Quiksilver, Hawk Designs, QS Retail, DC Shoes and QS Wholesale.
Oaktree also helped Quiksilver with “negotiating and obtaining consents from a majority of its Euro Notes holders” in order to waive “certain defaults” that would otherwise arise from the bankruptcy case,” Bruenjes said. “Such a waiver is an important component of the debtors’ efforts to preserve value in [Europe and the Asia-Pacific region] for the benefit of U.S. creditors during this chapter 11 process.”
“Oaktree’s financial strength and expertise, deep experience working with companies in situations similar to ours and successful history operating in our industry make them an exceptional partner for us going forward,” said Chief Executive Pierre Agnes, who took over for Andy Mooney, a onetime Nike Inc. executive who was fired in March, ending a two-year run with Quiksilver.
Meanwhile, the bankruptcy filing will give some breathing room for the domestic and overseas operations.
Suppliers
Quiksilver imports products from a variety of suppliers from China, South Korea, Indonesia, India, Vietnam, and other parts of Asia, and many of the same vendors who supply goods to its U.S. operations also supply goods to the company’s global affiliates, according to court documents.
The retailer has asked the court to approve a $52 million payment to vendors who supply essential goods and services and “cannot be replaced without significant harm to the business.”
