In the past, volatile cotton prices and recession induced drops in consumer spending have adversely affected the apparel industry. However, increasing population and rising disposable income growth are once again reviving the consumer spending pattern as the U.S. economy has targeted to bring unemployment down to 7% by the end of 2013. This will boost the industry’s revenue in the upcoming years. Recently, Hanesbrands Inc. (NYSE:HBI) acquired Maidenform Brands, Inc. (NYSE:MFB) in order to enhance its product portfolio and increase its market presence.
The reason behind paying 30% premium
The acquisition of Maidenform Brands, Inc. (NYSE:MFB) was very compelling as the company is a strong strategic fit into the core business of Hanesbrands Inc. (NYSE:HBI). It complements the Hanesbrands Inc. (NYSE:HBI)’ Innovate-to-Elevate strategy. Hanesbrands Inc. (NYSE:HBI) looks forward to achieving higher growth along with production cost cuts, derived from the larger scale of operations resulting from this deal.
The two companies operating together will enhance the efficiency of operations as previously Maidenform Brands, Inc. (NYSE:MFB) was buying all its products from outside manufacturers which will now be manufactured by Hanesbrands Inc. (NYSE:HBI). Hanesbrands Inc. (NYSE:HBI) will be utilizing its low cost supply chain to maximize the value of Maidenform to retailers and consumers.
The purchase of this company will enhance the product portfolio by adding shape wear and completing the bra range offered by Hanes. Currently, Hanes has a strong market position in the panty business. This grouping offers substantial long term growth prospects to Hanes by merging the relative strong points and potential capabilities of the two portfolios and cross introducing new products.
This deal is forecasted to deliver all expected synergies in the next three years, adding more than $500 million in sales and $80 million in operating profit. The incremental earning per share is estimated to be $0.60 per year. Pure value addition for shareholders will be $0.65 cash flow per share, an increase of nearly 100% on an annual basis.
The company will be utilizing cash available on hand and borrowings on its revolving credit facility. The new borrowing agreement will reduce its finance cost by 25 basis points and raise its borrowing limit to $1.1 billion. Hanes expects to repay its debt from the company’s free cash flow. Currently, Hanes’ long term debt to EBITDA has risen to 4.39 times. However, the company expects to maintain this ratio within the range of 1.5 – 2.5 times in the long run.
However, the announcement of this definitive agreement by Hanes has instigated scrutiny of the proposed acquisition of Maidenform by a number of law firms in the country. The investigation is focused on the possible breach of the fiduciary duty by the board of directors of Maidenform and aims to provide maximum value to the investors. If the case is proven right, then Hanes may be forced to pay a higher price for this acquisition, which would reduce the net synergies realized. However, it will benefit the shareholders of Maidenform.
The market position of competitors