The merger of the world's two largest surf brands, Quiksilver and Billabong, as well as their numerous subsidiaries, under the banner of Boardriders Inc., is no minor story.

The ramifications of the deal will be felt throughout the surf industry—in the pockets of investors, the media, and employees. On team rosters, event sponsorships, and beyond.

Quiksilver was founded in 1970, an early offshoot of Rip Curl wetsuits, producing boardshort designs that were, in slightly over a decade, licensed worldwide.

In 1986, Quiksilver became the first publicly traded surf company, and two years later penned the first Million Dollar Contract with a professional surfer (Tom Carroll). Until the financial crisis in 2008, Quiksilver stood among the most powerful and well known surf brands in the world.

Quiksilver’s famous Mountain and Wave graced the nose of Kelly Slater through the majority of his career, while the brand served as the title sponsor for The Eddie at Waimea until this year, ran the Quiksilver Crossing—a seven-year ecological survey/surf trip that engaged one Martin Daily, the MV Indies Trader, and a seaplane on a journey from Fiji to New York—and sponsored some of the most historic events in competitive surf history, at G-Land, Snapper Rocks, and France.

In 1990, Quik launched Roxy, an explosively popular women's brand built on the backs of Lisa Andersen and a host of young female surfers—dedicated to functional, stylish apparel for female surfers.

Billabong started in 1973, as high-quality, triple-stitched boardshorts manufactured in the basement of Gordon Merchant's Burleigh Heads home.

With the help of Bob Hurley, who purchased the US license in 1983, Billabong rose to worldwide prominence, producing legendary surf videos like The Green Iguana, and establishing the Billabong Odyssey, a three-year quest for a 100-foot wave. The Odyssey, developed by Bill Sharp, exposed Cortes Bank to the world, helping to reinvigorate public interest in big wave surfing and exposing the vast untapped potential for exploration and performance.

In the early 2000's business was booming for Quiksilver—post-Blue Crush, surf was hip, unwashed Middle Americans flocking to mega-malls en masse hoping to ape oceanic fashion. In 2004, the company reported earnings of over $1 billion.

In 2008, on the eve of the worldwide financial crisis, that number reached $2.5 billion.

As income rose, Quiksilver attempted to diversify. In 2004, DC shoes was acquired for $87 million, followed by ski giant Rossignol for a lofty $560 million.



Rossignol would prove to be Quik's undoing. In 2008, the ski brand was sold to its former CEO at a nearly $400 million loss.

In 2009, less than a year after Quiksilver's record income, the company underwent massive layoffs. The company was downgraded by Moody's, included in the bond credit rating business's Bottom Rung listing of companies most likely default on their debt.

Quiksilver continued to take losses until 2015, when it entered into Chapter 11 bankruptcy.

Enter Oaktree Capital Management, the world's largest distressed investor, which manages over $100 billion in assets worldwide.

The underlying philosophy of Oaktree, according to co-founder Howard Marks, is relatively simple.

“If you think you can see the future and the world is going to go according to your decisions, go for winner’s tennis. But if you think the world is full of randomness and uncertainty, spend your time trying to avoid losers.”

Simply put, Oaktree is not a venture capital firm. Its goal is not to invest in the next big thing, but to purchase entities with a solid foundation that are in financial trouble, often due to mismanagement or over-extension. Predicting a breakout success is nearly impossible, and largely a matter of luck. Reliable profitability can be more safely assured by employing due diligence and investing in companies with a proven history of sustainability.

Prior to entering bankruptcy Quiksilver entered into an agreement with Oaktree wherein the investor would supply $US175 million to be used for Quiksilver's restructuring, a debt which would be forgiven in exchange for a majority of Quik's equity. In 2016 Quiksilver emerged from bankruptcy and, owned by Oaktree, was moved under the umbrella of a re-branded corporate entity known as Boardriders Inc.



Billabong had also engaged in a "fat years" buying spree. Between 2004 and 2012 the company signed a licensing deal with skateboard brands Plan B and Element, and purchased Nixon Watches, RVCA, Xcel, Becker Surf and Sport's retail arm, Swell.com, Sector 9, West 49, and Dakine, among others.

In 2009 Billabong was on top of the world, but in three short years, it had almost all come crashing down.

August 2012 saw the company report a loss of a staggering $A859.5 million for the previous fiscal year, bringing down the value of the brand to zero.

In 2013, Oaktree received a 19 percent stake in Billabong in exchange for providing a rescue financing package in concert with Centerbridge Partners, which received 19.2 percent. The deal was struck after a previous offer from the pair had been rejected, and a refinancing arrangement was reached with Altamont Capital Partners. The Altamont deal was successfully challenged by Oaktree and Centerbridge under the argument that the deal contained provisions that “amount to lock-up devices that are anti-competitive and coercive.”

The finalized Oaktree/Centerbridge deal featured a $A360 million secured loan at 11.9% interest with a six-year maturity. It also included a $A135 million equity issue to the partners at $A0.41 per share and the issue of 29.6 million options to buy shares at $A0.50 each.

And now, in the latest deal, Boardriders Inc will be purchasing Billabong for more than $A198 million, an arrangement which will move the company from a public to private entity, purchasing shares for a sum of $A1.05 each.

Oaktree's shares will not be purchased by Boardriders, nor will it vote its shares when shareholders consider approval of the merger.

A recently announced $US600 million loan package will be used to back Boardriders purchase of Billabong and refinance its current loans. $US150 million will come from Bank of America Merrill Lynch, in the form of an asset-based revolving credit facility, while the $US450 million remainder will come in the form of a term loan provided by Deutsche Bank, BAML, and Macquarie Capital.

In short, Oaktree has managed to acquire two surf industry titans, double the value of its Billabong shares, and be made whole on the loans it made to itself, in the form of payments made using money lent to Boardriders Inc.

The merger still requires shareholder, court, and regulatory approval before it is finalized. But if it is, the presence of a surf industry monolith the likes of which has never before existed will no doubt have enormous effects on the industry as a whole.

http://www.youtube.com/watch?v=r3Fbl3D_MNU

Boardrider Inc.'s way forward includes plans to re-expand back into retail, with plans to expand Boardriders shops—which originated in France into community hubs, including cafes and live music. In Los Angeles, surfers will enjoy a waterfront Boardriders shop between Malibu and Topanga, in the renovated remains of one of American Apparel's most high-dollar brick and mortar retail locations.

"I think they're just looking at scalability, in terms of those businesses and what they can learn from it," one person told me. "I think the difference between a Quik and a Billabong, in comparison to Nike, is quite big. They're just trying to work out what systems they can put in place to help them grow. Because that's the only way they can justify existing, unfortunately."

Current employees face increasing uncertainty as redundancy looms. Public comments regarding "rightsizing" point directly toward layoffs. Certainly first within administration staff, likely eventually within marketing and sales as the brands become increasingly intertwined and seek to avoid competing for the exact same customers.

Team rosters, always a target when looking to decrease operating costs, no doubt face an incoming slash and burn. Synergistic sponsorships, wherein a rider reps multiple brands owned by Boardriders, seem a foregone conclusion. These will, inevitably, lead to lower rates across the board as contracts stipulate multi-brand deals, reducing the ability of riders to negotiate sponsorships across various accessory markets.

Despite a company-wide email instructing employees that "If you are contacted by any news outlets or reporters, please do not respond and direct all inquiries to our PR firm, Sitrick and Company," numerous current and former employees, at both Billabong and Quiksilver, were willing to speak with me on background, or under condition of anonymity.

Confidence going forward is shakey, with employees at Billabong, "scared of everything, for quite a while now."

New faces, outsiders tasked with righting the ship, are met with skepticism. In the world of big business, surf is small peanuts, and there's a feeling among current employees that those in charge have sought their positions due to an inability to find success on the outside.

"Anybody that comes in from a non-surf background, I get suspicious that they couldn't really make it in the ‘real’ world. There's a reason why they're not at, like, fucking IBM."

Whether or not that sentiment is generally true, it doesn’t exactly apply to Boardriders’s new CEO Dave Tanner. Serving as managing director and head of portfolio transformation team at Oaktree since 2011, as well as Boardriders’s Chief Turnaround Officer since 2016 and as “an advisor to the leadership team at Billabong on the development and execution of their turnaround program” from 2013-2015, Tanner’s role within the company is to streamline operations in the pursuit of profitability, rather than shape a vision of the brand going forward. In that context, a lack of long time relationships within the sport could serve as an advantage. Tanner is not burdened with a notion of how a successful surf brand should function, nor is he beholden to the often idiosyncratic culture of the sport.

Mr. Tanner’s newest role as Chief Executive Officer at Boardriders Inc. is not a new development, though the timeline has been moved forward by the unexpected death of Pierre Agnes, Boardriders’s most recent CEO, in a boating accident off his home coast of France.

The initial plan would have seen Tanner assume CEO duties at some point in the future, with Agnes becoming president of the company.

Some take a more positive view of the coming changes. While it's widely agreed that Oaktree has no real stake in surfing, in the long-term, the necessity of keeping brand identity separate lends credence to claims that, outside of back-end operations, the companies will remain largely independent.

"Because if you don't have brand identity in that surf space you don't have much," an employee told Stab.

Regardless of how successful the merger and subsequent plans for growth prove to be, it is unlikely the current ownership is permanent. Oaktree is not in the business of maintaining companies. Billabong will face cuts, similar to those already underway at Quiksilver, then the entire mess will be sold. Either together, if a big enough buyer emerges, or piecemeal.

The ordeal is enough to call into question the very existence of massive “core” surf brands moving forward. "Core" consumers will always remain a small part of any global surf brand's business, due to, quite simply, the limited amount of humanity who can afford to live within coastal areas featuring somewhat consistent surf. To truly grow, do brands need to entice the landlubbers, return to the heydays of the turn of the century?

"It's funny, I've thought about it a lot over the years, and all these small brands that are around, half of them wouldn't even exist if the bigger brands didn't exist in the first place,” an employee told Stab. “Everyone is very quick to write off the big guys, but if you think about all the people that have shot off and done their own thing, smaller labels and stuff like that, that have all started because of the big guys, the surfing landscape is probably a better place for it. But they haven't, probably, handled their transitions in the best way."

But what, exactly, constitutes a surf brand, in 2018?

T-shirts, sunglasses, hats, shoes—what’s commonly referred to as Soft Goods—comprise what could be called surf “fashion.” But it’s all fairly irrelevant, in the context of the act of surfing.

Aside from trunks, clothes mask on-land nudity; simply slapping a silk-screened wave or surfy logo on a t-shirt does not make a “core” brand, I’m afraid.

An Origin Story is useful, though. It keeps the consumer’s focus on the historic moment that birthed the brand, even if over time a brand’s purpose evolves, sometimes beyond recognition. Billabong and Quiksilver qualify as Core surf brands, arguably the most successful to ever walk the line over their decades-long existence. But with the two industry Goliaths merging, what that future looks like, and whether a return to growth is possible, remains to be seen.

It's somewhat ironic that, while big surf brands have long chased outside money, when it finally arrived it came in the form of a massive semi-predatory lending firm.

Whether or not consumers like a corporation that size within the surf realm, its creation seems a foregone conclusion. Despite last minute negotiations and an uncertainty regarding how a few large shareholders would lean, last week 85.87 percent of eligible shareholders voted in favor of the merger.

While the merger is still pending regulatory approval, the lack of substantial opposition means it will, barring unforeseen circumstances, likely be approved, leading to the creation of a surf conglomerate the likes of which has never been seen before.