BREAKINGVIEWS-Hanes underwear deal looks too skimpy

By Jennifer Saba

NEW YORK, Aug 13 (Reuters Breakingviews) - An apparel tie-up is leaving one party overexposed. Canada’s Gildan Activewear GIL.TO wants to buy rival T-shirt, bra and boxer maker HanesBrands HBI.N for $2.2 billion. Chunky cost savings cover the premium roughly four times over, but the buyer is getting the overwhelming share of that upside. Investor reaction suggests that, despite a threadbare target, the terms might be too lopsided.

Gildan, the owner of American Apparel and Goldtoe socks, agreed on Wednesday to purchase the company behind the 125-year old Hanes brand in a mix of cash and stock. Based on undisturbed share prices, the offer amounts to $6 per share, representing a premium of about $400 million, or some 24%. Hanes investors will end up owning a fifth of the combined firm.

Dealmakers are touting $200 million in profit-boosting cost synergies. Add those savings to Hanes’ $477 million of estimated operating income this year, per Visible Alpha, tax it, and the implied return is 13%. That figure is better than Hanes’ 8% cost of capital, by Morningstar analysts’ reckoning. Put another way, the efficiencies represent $1.6 billion in net present value, once capitalized and accounting for Uncle Sam’s take.

The deal is stitched together by a reasonable strategic rationale. Gildan can tap Hanes’ expertise in retail and expand its product base. Meanwhile, Hanes could use its new owner’s financial heft. The company is looking worse for the wear these days, sporting debt that stands at 4 times its estimated 2025 EBITDA as revenue tumbles. In 2023, the year before it sold sportwear line Champion, it reported sales of $4 billion, down 9% from the previous twelve-month stretch.

Yet those tantalizing synergies are only possible with a deal, and the cut of them accruing to Hanes’ investors is worth a measly $0.87 a share. The acquisition is clearly opportunistic, coming after an 86% slump in the target’s market capitalization since 2015. Its stock leaped to around $6.50 on Wednesday morning, above the offer’s implied value even after an 11% run-up in Gildan’s shares. While Hanes ends up in a better and bigger company, it doesn’t mean its owners won’t want a bit more coverage.

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CONTEXT NEWS

Gildan Activewear agreed on August 13 to acquire HanesBrands for $2.2 billion, a 24% premium to the T-shirt maker’s undisturbed price on August 11. Including debt, the deal’s enterprise value comes in at $4.4 billion.

Gildan, the Canadian owner of American Apparel and Goldtoe, is offering a mix of cash and stock equivalent to $6 per share. HanesBrands’ investors will own 19.9% of the combined company.

Shares of Hanes were trading above the offer price at $6.51 in mid-morning trading on August 13, while Gildan’s shares were up 12%.