Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Hanesbrands is sticking to basics, and shareholders couldn't be happier. 

The $11.4 billion apparel maker surged as much as 9.5 percent on Thursday after agreeing to buy Australian rival Pacific Brands, which owns underwear brand Bonds, for roughly $800 million and signing off on a new share buyback program. 

It's easy to see why the company and its investors are so enthusiastic about the transaction. It's expected to make Hanesbrands the largest basic apparel company in the world, will contribute to earnings immediately and deliver additional operating profit of about $100 million within three years. Already a savvy dealmaker, Hanesbrands has added $120 million in operating profit from completed acquisitions and an additional $170 million from synergies, according to chairman and CEO Rich Noll.

Under his stewardship, the North Carolina-based company has increased sales from roughly $3.9 billion in 2009 (11 percent from international markets) to a projected $7 billion in 2016 (more than 30 percent from offshore businesses). Plus, Hanesbrands has given shareholders a total annualized return of nearly 36.7 percent, besting a peer average of 28.7 percent, according to data compiled by Bloomberg.  

Hey, Big Spender
Hanesbrands has spent at least $2.3 billion on acquisitions in the past three years to bolster sales and earnings growth
Source: Bloomberg
*2016 and 2017 estimates don't yet reflect the financial impact from the Pacific Brands acquisition.

Hanesbrands could have snapped up Pacific Brands a little sooner, considering its shares had more than doubled in the past 12 months even before the deal's announcement. But it minimized risk by waiting to see whether the Australian company's turnaround had succeeded. Pacific Brands spent the past few years shedding noncore brands, cutting some 1,800 jobs, outsourcing manufacturing to China and setting out on a revamped quest for growth that involved becoming less reliant on wholesale distribution channels. Pacific Brands said it would pay its first dividend in two years this past February, signaling that it was back on track. 

Patience Pays
North Carolina-based Hanesbrands waited for Pacific Brands to emerge from a successful turnaround before pouncing
Source: Bloomberg

The deal highlights a missed opportunity for private equity firms including KKR & Co., which in 2012 made an unsolicited approach to buy Pacific Brands, which was valued around $520 million at the time. TPG was also reportedly considering a bid at the time, but no deal ever materialized, in part because of price. Should a buyer have reached a deal and executed a similar or improved turnaround, it could have almost doubled its money  from a quick sale to Hanesbrands. 

Notably, even though currency is rarely the sole driver for strategic M&A, Hanesbrands' foray down under comes while the Australian dollar is relatively weak against the U.S. dollar, which makes the deal even easier to swallow. 

Advantage, USA
Even though the Australian dollar has bounced from its seven-year low, it's still a good time to be a U.S. acquirer.
Source: Bloomberg

And even though the Hanesbrands deal lifts outbound M&A by U.S. companies to $45 billion this year, it's still on track for the lowest level of such activity since 2010, in part because of the large number of corporate inversions. This trend could be reversed however, if Treasury prevails in its efforts to curb such deals . 

Staying Ashore
U.S. companies are on track to spend the least on outbound M&A since 2010 despite the reasonably strong U.S. dollar
Source: Bloomberg

Hanesbrands itself hasn't ruled out more purchases this year. Even with its net debt-to-Ebitda ratio set to climb to 2.8 by the end of 2016 (within its targeted range of 2 to 3), there's room for another, albeit smaller, deal. That one, too, will likely be warmly received by investors. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Calculation includes the reinvestment of dividends.

  2. Assuming it paid roughly $650 million for Pacific Brands and funded the deal with a 30 percent equity check. 

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net