Hanesbrands - An Astonishing Good Deal, Yet Appeal Is Limited After Shares Have Doubled Already

Jun.27.14 | About: Hanesbrands Inc. (HBI)


Hanesbrands makes a great deal by acquiring DBApparel.

The deal is already attractive on the stand-alone financials, yet synergy potential is enormous.

Despite this great deal and last year's deal, shares are a bit pricey after having nearly doubled over the past year.

Shares of Hanesbrands (NYSE:HBI) jumped to fresh all-time highs on Wednesday after the company acquired Europe-based DBApparel in what appears to be a hugely accretive deal.

After years of stagnation this could be the second great deal in less than a year, prompting huge enthusiasm on the stock market.

The Deal Highlights

Hanesbrands announced its intentions to acquire DBApparel, the French company which currently is in the hands of Sun Capital Partners.

DBApparel is a leading intimate apparel and underwear company in Europe, as the deal allows Hanesbrands to leverage its ¨innovate-to-elevate strategy¨ as well as global supply chain operations.

Hanesbrands will pay roughly $550 million in an all-cash deal for the company including the assumption of debt.

The deal could as close as the third quarter of this year.

Strategic Rationale

DBA is not a complete stranger to Hanesbrands as both companies were separate sister companies previously owned by Sara Lee Corporation. Sun Capital acquired the firms in 2006 and has spun off Hanesbrands in an IPO.

Combined, the firms would be one of the largest innerwear apparel companies in the world having worldwide rights to Playtex, Wonderbra and DIM brands. Both companies can be re-united again, which should bode well for growth and margin-expansion opportunities. According to CEO Richard Noll, the nearly $6 billion business should be able to leverage its ¨innovate-to-elevate¨ strategy while leveraging the supply chain.

With the deal, Hanesbrands gets a major presence in Western and Central Europe, a geographic area in which it is not really active yet. DBA sells innerwear in 16 European companies being the market leader in France and Spain.

Financial Implications

DBApparel posted revenues of some $875 million which values the company at roughly 0.6 times sales.

The deal will be accretive in the first year after closing, including an accretive effect of $0.25 to adjusted earnings per share by 2015. Assuming full realization of synergies in three or four years time, earnings accretion is seen at around $1.00 per share based on additional adjusted operating earnings of $125 million. Based on these incremental operating earnings, Hanesbrands is paying an operating earnings multiple of just 4.4 times!

The deal values DBApparel at 7.5 times EBITDA, or roughly 4 times EBITDA assuming the full realization of future synergies. This implies that EIBTDA is seen around $73 million while anticipated synergies are seen at $64 million per annum a few years down the road. Assuming statutory tax rates, after-tax profits could rise by an estimated $42 million per year just on the anticipated synergies alone. Even if DBApparel was breaking even, while it is actually solidly profitable, the deal values the company at just 13 times anticipated after tax synergies! This is a sizable discount to Hanesbrands' own valuation and even excludes the solid profit contribution from the acquisition.

That alone should be reasons enough to by very enthusiastic about the deal.

Valuing Hanesbrands

Back in April, Hanesbrands released its first-quarter results. The company ended the quarter with $151.1 million in cash and equivalents while it does hold a sizable $1.66 billion total debt position. This results in a net debt position of about $1.5 billion and makes it necessary for Hanesbrands to issue new debt to finance the deal which could push the net debt position towards $2 billion.

First-quarter sales of Hanesbrands were up by 12.0% to $1.06 billion while net earnings fell by 19% to $41.6 million. $42.6 million in acquisition and related costs put big pressure on reported earnings.

For the upcoming year, annual revenues are seen around $5.1 billion while adjusted earnings are anticipated to come in between $4.80 to $5.00 per share.

Factoring in the 9% jump following the deal with shares trading at $97 per share, equity in Hanesbrands is valued at $9.6 billion. This values equity of the business at 1.9 times annual sales and 19-20 times anticipated adjusted earnings.

The company's $0.30 per share quarterly dividend provides investors with a 1.2% dividend yield.

Investors Are Cheering About The Deal

Investors are extremely pleased with the deal. Shares jumped more than $8 following the announcement of the deal, adding roughly $800 million in market capitalization on the back of a $550 million deal.

This of course driven by the very favorable deal both in terms of operating earnings accretion as well as the very sizable synergy estimates. The comments about expected accretion of $1.00 per share three years ahead was a reason for investors to cheer.

On a pro-forma basis, the company will post revenues of about $6 billion with adjusted earnings anticipated to improve to about $6 per share. This values equity at 1.6 times sales and roughly 16 times adjusted earnings.

Final Takeaway

Investors in Hanesbrands have seen a good run. After debuting in the summer of 2006, shares have traded in a rather wide $5-$35 trading range. At the start of 2013, shares took off to double towards $70 by the end of that year. Strength earlier this year and the latest deal have pushed shares to fresh highs, just below $100 per share.

Of interest for shareholders, over this time period the company has failed to show revenue growth with exception of the last few quarters as growth is driven by acquisitions.

Last year, the company bought Maidenform in a $575 million deal, followed by the deal with DBApparel. These deals financed with cash at hand and leverage have improved the earnings per share growth profile a lot. On their own merits, the deals have been accretive as well, with value being created thanks to the synergies anticipated to be realized.

While the company is quickly building up an aggressive track record for making deals, I am hesitant to pick up shares given the premium valuation, the strong momentum and slow growth in the core business after striping out the effects of acquisitions.

I am on the sidelines, but will keep an eye on the company.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.