* Billabong cuts earnings guidance as markets worsen
* 6-for-7 entitlement offer at 44 pct discount to cut debt
* Founder Gordon Merchant to take up 85% of entitlement (Adds detail, analyst comment)
MELBOURNE, June 21 (Reuters) - Australian surfwear company Billabong International is selling stock to existing shareholders to raise A$225 million ($229.24 million) to pay down debt as it cuts its full-year earnings guidance, hurt by weak export demand.
Billabong, whose shares have slumped 70 percent in the past year, is taking steps to strengthen its balance sheets as sales slow in Europe, Canada and Australia.
The company launched a six-for-seven entitlement offer at a price of A$1.02 per share, a discount of 44 percent to Wednesday's closing price. The stock last traded at A$1.83.
"You either participate or get massively diluted - a huge slap in the face again for shareholders," said Citi Index analyst Peter Esho, predicting "a lot of criticism from shareholders and rightly so."
In February, Billabong rejected a takeover offer worth A$841 million from private equity suitor TPG Capital, saying an increased offer of A$3.30 a share still did not reflect the value of Billabong. The stock traded above A$6 in June last year.
"Private equity pulled the plug and the company now needs to take more pain by raising equity from already struggling shareholders," Esho said.
Gordon Merchant, Billabong's founder and largest shareholder, would subscribe for A$30 million, or 85 percent of his entitlement.
Billabong on Thursday lowered its forecast for comparable-basis full-year earnings before interest, tax, depreciation and amortisation (EBITDA) for 2012 to A$130 million to A$135 million.
That compares with a February estimate of over A$157 million, excluding one-off charges.
Overseas market conditions have been challenging in recent months.
"In Europe, sovereign debt issues are having a significant adverse impact on consumer confidence and demand," Billabong said.
Billabong is closing up to 150 underperforming stores and selling its Nixon watch brand to pay down debt.
Billabong said that on completion of the offer, forecast net debt would fall to around A$100 million at June 30 from A$325 million.
Esho did not recommend taking up the share offer.
"Brands find it very hard to recover after periods of underinvestment unless they are niche enough or of a high quality where trust can be won back over time. Billabong unfortunately for us is not of the same ranking as a Nike or a Louis Vuitton," he said. ($1 = 0.9815 Australian dollars) (Reporting by Miranda Maxwell; Editing by Ryan Woo)