One of the biggest news events on the market Wednesday was Hanesbrands' (NYSE:HBI) announced acquisition of Maidenform Brands (NYSE:MFB). Together, the two companies will be a leader in many clothing categories and able to create extreme value through synergies, expanded customer relationships, international sales, and increased margins through manufacturing.
Hanesbrands is paying $575 million for Maidenform Brands. The deal equates to $23.50 per share, a 23% premium to Maidenform's Tuesday closing price. The deal will boost earnings per share within the first 12 months after closing. Hanesbrands has also announced that the deal will add $500 million in incremental sales, $0.60 in earnings per share, $80 million of operating profit, and $65 million in free cash flow within a three year period.
Maidenform Brands owned brands include:
· Self Expressions
· Sweet Nothing
· Donna Karan (under license)
· DKNY (under license)
In 2012, Maidenform saw 57% of sales from the bra category. Shapewear made up 35% of total sales. Hanes has strong recognizable brands like:
· Just My Size
· Barely There
· Donna Karan (under license)
· DKNY (under license)
Hanesbrands had the number one market share in the following categories prior to the deal:
· Men's underwear
· Kids underwear
Hanesbrands also has the number two market share in bras and panties. L Brands (LTD) has the number one share in the total underwear market with its Victoria's Secret brand. The acquisition strengthens Hanesbrands in both bras and panties. Hanes has the number two share of underwear with 14.3% market share. Maidenform ranks fifth with 2.5%. Together, the company will be one of the leading underwear companies.
One of the easiest ways to see the value of the deal is Hanesbrands' unique innovate-to-elevate platforms. Hanesbrands integrates world-class brands, low cost supply chain, and product innovation. Hanesbrands uses their own manufacturing for the majority of their products, with supplemental manufacturing from third party companies. On the other side of the deal, Maidenform Brands uses third party manufacturing for all of its products.
Hanesbrands will slowly integrate Maidenform products into its manufacturing. This should pay off huge for the company as it will boost profit margins. Hanesbrands will also work on lowering prices on several Maidenform items. Over two-thirds of Hanesbrands bras are made in house, which will likely end up the same percentage for Maidenform. The acquisition also dilutes Hanesbrands' exposure to cotton, which could help with commodity costs.
Another area that will increase Hanesbrands sales is international sales. Maidenform Brands realized 90% of total sales in the United States. Hanesbrands also has a similar lack of international sales. However, the two have strengths in different regions, which will power an increased percentage of total sales.
Hanesbrands saw 11% of total sales in 2012 come from international markets. The company did say it was looking at international acquisitions. Small deals help the company gain entry to new markets and an easier ability to launch its own products. In Brazil, Hanesbrands made a small acquisition 10 years ago. The company now has the number one men's underwear brand. Hanesbrands did also mention Asia as an area where Maidenform is weaker and could see boosted sales through the company's size and scale.
Hanesbrands is using cash and short term debt to finance the deal. The company will pay off the short term debt with free cash flow, ensuring no interest payments on the acquisition. Earlier this year, Hanesbrands initiated a dividend, which will amount to $0.80 on an annual basis. The company is paying out hardly any of its earnings, but leaves the ability to boost payments and also make a deal this size happen without impacting financial stability. After this deal is paid off, I expect Hanesbrands to make small international acquisitions and begin returning money to shareholders through boosted dividends and share buybacks.
Back in May, I highlighted Hanesbrands as a strong investment with new products and new retail deals. These reasons bode true with the new acquisition. In fact, the company's strong retail relationships could boost points of retail for the smaller Maidenform Brands. Consider, Wal-Mart is dedicating more space to Hanesbrands' products this year. Macy's is also boosting its presence by offering Hanesbrands men's underwear this year.
In that article, I recommended buying shares of Hanesbrands on dips under $50. Investors won't likely have that chance again, as shares sit above $57 and traded as high as $59 on the news. However, with boosted earnings per share and more details emerging when Hanesbrands announces quarterly earnings on July 30th, investors should still consider getting in on this deal. Investing in underwear could be the best thing for your portfolio.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HBI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.