It took Bain Capital an almost embarrassingly quick time to kick the tyres on troubled surf-wear group Billabong and walk away. All of two weeks.

That’s embarrassing for Billabong because it not only appears to remove the prospect of an auction with the remaining suitor, TPG, but creates the appearance that Bain, after a quick look at the company, was so disturbed it ran away as fast as it could.

That isn’t necessarily the case. TPG has been stalking Billabong since the start of this year and would know the company as well as anyone outside of it and it’s still there and is still conducting a due diligence process that self-evidently is more exhaustive than Bain’s, given that it informally and formally started earlier and is continuing.

TPG also has a lot of experience with retail businesses, here and offshore, to draw on and may be more comfortable that it can execute a turnaround and extract the considerable upside latent within Billabong than Bain, even in a global economic environment studded with significant risks. Certainly, in two weeks Bain couldn’t have collected the insights TPG would have into the business.

Billabong, if it can be turned around, won’t be an easy or quick or riskless play. Billabong’s new chief executive, Launa Inman, unveiled a strategy to generate incremental earnings before interest, tax depreciation and amortisation of more than $155 million in a strategy presentation delivered in August — but the plan is a four-year plan that involves an investment of $80 million.

“Billabong, if it can be turned around, won’t be an easy or quick or riskless play”

So there is a lot of potential upside in Billabong but extracting it involves meaningful lumps of capital, significant risk and quite a considerable period of time. TPG has shown previously, when it acquired a very run-down Myer, that it is prepared to contemplate exactly that kind of investment in return for a massive pay-off if it can execute the turnaround well.

Having “lost” Bain from the process Billabong has only two options. It’s either TPG or it will have to go it alone.

It is conceivable that now that Bain has departed TPG might contemplate playing hard ball and seek to drop its $1.45 a share indicate price that values Billabong at $695 million. Effectively, however, the Billabong board is in the same position that it was in before Bain surfaced and has the same negotiating leverage today that it had then.

TPG, as with any private equity play, needs to execute it via a scheme of arrangement to ensure that it achieves 100% ownership. That’s usually a precondition of private equity funding.

It can’t, however, impose a scheme on Billabong. The Billabong board needs to co-operate and endorse it and therefore the board’s support is vital.

With the board saying today that in any change-of-control transaction it would seek to ensure that the medium-to-long-term prospects of the company and its brands were reflected in the value realised by shareholders, there is no certainty that it would endorse an offer of $1.45 a share given that Inman’s strategy, if she can execute it, would unlock considerably more value than that.

Thus it is still open to the board to use its leverage to try to prise something more from TPG, assuming TPG comes out of the due diligence process with its interest in acquiring Billabong intact.

While Billabong’s shareholders might not be too happy if their board tries to push for something more and risks losing TPG in the process, TPG has no history of going hostile and in any event trying to unseat the board would (a) consume a considerable amount of time and (b) not necessarily produce a more compliant slate of directors given the fiduciary obligations any director has.

If TPG, too, walks away the board would have no option but to batten down the hatches and back Inman to pursue her strategy, the core of which is to shrink a large and highly unproductive product range to the core profitable products and do something even more draconian to a similarly large and unproductive range of suppliers.

There is a lot more to it, of course, than that — the retail brands need repositioning, the retail store network needs rationalising, a lot more retail skills have to be brought to bear, the supply chain has to be completely overhauled and Inman wants to build an e-commerce platform.

If she could pull it off, however, Billabong would be worth several times, at least, what it is worth today and what a TPG or anyone else would pay today given the execution and external risks.

*This article was first published at Business Spectator