On July 30, TransWorld Business sat down with Quiksilver Chairman, CEO, and President Bob McKnight for an exclusive interview on the state of the company, the future of the action sports industry, and the challenges of the current economic climate. It's the first interview that McKnight has granted since the company entered into a silence policy he refers to as "Red October Mode" concerning its financial situation. In this first installment, McKnight outlines Quiksilver's banking arrangements in the US and Europe, how buying Rossignol affected Quiksilver Europe's credit facilities, and what the company's most recent financial announcement means to the bottom line.
Stay tuned for more installments from this interview online, but you'll have to subscribe to TransWorld Business to receive a copy of the September issue if you want to read this interview in its entirety, along with in-depth interviews with Pacific Sunwear's new CEO Gary Schoenfeld, Burton Snowboards CEO Laurent Potdevin, and many more of the industry's most influential executives.
Can you explain Quiksilver's banking arrangements both in Europe and the US?
Our company, because it's global, is really complicated with our banking arrangements. Not complicated in a negative way, just complicated.
We started in Europe about the same time we started in America, and they of course through their own means had their own banking arrangements in Europe. As they grew they ended up having what's called a club deal in Europe. I think there's like ten banks that have a syndicate and finance Quiksilver Europe's business, which extends from Russia all the way through Northern Europe, down in to the Africas, and that whole gamut. Everything they do is financed through this club banking arrangement. It's led by a bank called Société Général. That's how it's always been, and there's usually been no collateral and no guarantees because we're so cash flow generative that they didn't really need to have anything beyond that.
So they had that arrangement over there and we have what's called an A.B.L. (Asset Based Lending) system over here [in the US] led by J.P. Morgan and other banks—it's a little bit of a syndicate as well. I won't talk about the one in South-East Asia, but it's a smaller line because it's a smaller volume territory. The biggest territories are here [US] and Europe. Each one of those businesses is about 900 million.
In the old days we could send monies back and forth [from Europe to the US] with no problem. What complicated that situation is adding Rossignol to the group because with the Rossignol acquisition we had to spend $600 million, and we had to go and do a bond offering. So now we have debt in the form of a bond out there, and our banks in Europe and our banks in America financed the rest of it.
The banks in Europe eventually took it over because the company [Rossi] is located in Europe. So the French banks then put what is called a ring fence around it [Quiksilver’s line of credit]. So what that means is that we can't send money in and they [Quiksilver Europe] can't send money out. That banking arrangement was for the Quikslver European business only, which included Rossignol.
Did you get any say in the matter?
No, it's a bank decision. So then, J.P. Morgan decided they better do the same thing here in America, and they ring fenced our banking arrangements in America, which is no big deal. We have two banking arrangements, which are now ring fenced, and so we operate like that.
When did the effects of the Rossignol deal come into play?
Then, as you know well, Rossignol hit the skids about three years ago when we had the worst winter in 100 years and business just blew up. It was the worst year Rossi ever had. It puts the business back about two years because people couldn't pay for their goods, they couldn't re-order obviously, they couldn't place a new order because they already had skis in inventory, and so it screwed up not only that year, but also the next year, and a lot of the following year.
We got wind of that and tried to pull ourselves out of that tailspin with Rossi, and so we decided to sell it. By the time we decided to sell it and J.P. Morgan got involved in selling it we had a buyer, but the recession hit so the price went down and down and down. The buyer eventually got it for nothing, but we were finally able to get it off our books.
In the meantime, the banking arrangements stayed ring fenced. So what happened is the banking stuff in Europe was coming due, which was a little over a year ago, in June. We kept pushing it off and getting extensions because they knew that: A.) We have a great company, and B.) Even without Rossignol we have three great brands [Quiksilver, Roxy, and DC], which they know are very profitable, do wonderful things, and are very front and center in the minds of Europeans.
The banks don't want to bankrupt us, put us out of business, or screw with us. They're understanding of our situation, so they kept extending our thing [credit line] out. We kept telling them that we were going to sell Rossignol soon, that we had a buyer, and that we were just working out the details of the deal. We were going to pay some of it [debt] back and do a new banking arrangement.
They kept giving us extensions, and finally the Rossignol thing happened. But, we weren't able to pay too much down on the European bank line. So then they gave us another extension to pay some more back.
Why do you think they were so willing to extend the terms?
They knew we were then going into a mode of either selling DC, or doing a re-financing. We had several buyers for DC, but the prices weren't high because we're in recession.
We had many, many people interested in doing a re-financing. We had some big companies that I'm not going to name, and we had individuals with lots of money who were interested in helping us out. Everyone was interested in helping us, but everyone got to the point where they didn't really understand the French banking thing. They thought that was scary. They loved the company and loved the brand, they saw that we are still making money in the recession, they believed in Quiksilver and Roxy and the power of our brands, but they just couldn't get beyond the French banking thing because it's a socialistic country, they have a different banking system, et cetera.
We're comfortable with it because we live and breathe it every day and we've been doing this thing for many years. Through the club deal to the ring fencing to the Rossi deal, we know how cooperative they are with us because they love us. But everybody else doesn't know that. Everybody was thinking that they were going to come in and slap us into bankruptcy in Europe and take all of our assets.
Well, what are they going to do with Quiksilver and Roxy? They don't know how to run the company. They're not going to do that. We knew that, but they [potential re-financiers] didn't.
Is that where Rhône came in to the picture?
Yes. It ended up that we settled with this company called Rhône, who is a global banking company that has offices in Paris, London, and New York. They're young, they're aggressive, and they're very quite about how they do their business. You can't even look them up online. When you say private equity, they're the real deal!
They have investments in all sorts of high-end companies, they understand management structures in companies, brands, retail, and all the things we do. They loved us, they're surfers, and so they gravitated toward us right away.
When it came to the French banking thing, they said: 'This stuff is easy. If this is the thing nobody else understand it's a slam-dunk. We work with these guys every day.' They have a lot of connections with the French banks, and are very familiar and very comfortable with that. They've been able to help us navigate through this whole thing very easily.
Are the financing deals going to close by July 31 and, if not, don't you have to further extend your bank deals? [this interview was conducted on Thursday, July, 30 2009]
So the deadline for the French line is coming up tomorrow [July 31] , and you'll read next week how that's been satisfied [read press release here]. We're flying to New York tonight to have a closing dinner tomorrow night. Basically, we're re-working the Rhône deal, and they are giving us a four-year extension. It gives us all this bandwidth now and breathe-ability to cover ourselves. Plus, we were able to keep DC, which is wonderful. So we're really excited and enthusiastic.
How difficult has dealing with these banking situations made running the business over the past twelve months?
The last year and a half has been Hell because that's all we've been doing—trying to work through the banking thing to keep it all going. In the meantime we sell Rossignol, recession hits, and our stock went down to eighty cents. It's just been horrible. But we lived through it, it has made us stronger, and at the end of the day we have three great brands and wonderful people here that are very passionate and loyal. We're just going to power through.
Stay tuned to TransWorld Business to hear McKnight's thoughts on the formation of a new world tour for professional surfers, much more detailed discussion of Rossignols impact on Quiksilver, the future of specialty retail, and much, much more.