HanesBrands’ enticing bid for Pacific Brands

The tempting takeover offer of the tentatively recovering Pacific Brands by US retail giant, HanesBrands, is an offer the Bonds owner can’t refuse.

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It would be a tougher decision for Pacific Brands shareholders to choose between a Tim Tam and a chocolate teddy bear biscuit than to accept the HanesBrands takeover offer.

It certainly didn’t seem to take Pacific Brands’ directors too long to endorse the unsolicited $1.1 billion takeover offer based on an offer price of $1.15 per share.

Pacific Brands qualifies as yet another long-term dud float by private equity for those gallant shareholders who bought shares at $2.50 each back in 2004 when CVC and Catalyst listed the company on the Australian Stock Exchange.

The company is also listed on the New Zealand Stock Exchange.

Not all Pacific Brands shareholders will be losers, of course, as any investors picking up shares since 2011 will be ahead on their initial outlay if they sell at HanesBrands’ offer price, albeit a dearth of dividend payments would have made it more prudent to have left their money in the bank.

In January 2012, the private equity firm, Kohlberg Kravis Roberts, offered to buy Pacific Brands for $600 million, but the bid was rebuffed.

At the time, the shares were hovering around a penny dreadfuls’ 50 cents each. However, the nadir for the scrip was in July last year when the shares were worth just 32 cents each.

With shares running as high $3.50 in 2007, CVC and Catalyst would argue the 2004 float at $2.50 was successful. But Repco and Dick Smith, like Pacific Brands, are examples of listings that have turned sour much quicker than should have occurred following their private equity makeovers.

After rejecting Kohlberg Kravis Roberts in 2012, the Pacific Brands board launched a turnaround strategy, cutting costs, paying down debt, shifting manufacturing overseas and selling off some assets.

Pacific Brands is in a vastly different position than in 2012 and, notwithstanding an improved outlook for the first half of the 2016 financial year, there is arguably an exhaustion factor and little appetite for looming new market challenges.

It helps, of course, that HanesBrands’ bid values the company at almost double the level of Kohlberg Kravis Roberts’ offer, but any reasonable bid was certain to receive more positive consideration this time round.

However, the key reason why accepting the HanesBrands bid is so attractive to the Pacific Brands board is the changing retail landscape and the very real prospect of a markedly reduced order book.

Pacific Brands lost the Kmart business in 2011 as the discount department store chain moved to direct sourcing of its product ranges and the merger of Kmart and Target announced by Wesfarmers in February was ominous.

The acquisition of Best & Less and Harris Scarfe by the South African retailer, Steinhoff International, through its local Pepkor arm, also represents a significant risk for Pacific Brands as a supplier into the future.

Best & Less and Harris Scarfe have been chalking up sizeable losses, and sourcing products more cheaply is now a key strategy. Steinhoff International also owns the bedding chain, Snooze.

Just as threatening to Pacific Brands is a deal struck late last year with the British retailer, Debenhams, to stock key brands.

Creating further uncertainty, Myer is chopping and changing ranges, looking to cut costs and re-align its brands, while David Jones is stocking its stores with product ranges from the suppliers to the department store’s African retail brands.

The wave of international retailers entering Australia are bringing with them their own brands, further eroding Pacific Brands’ sales prospects for the future if it were to remain a standalone local apparel and manchester supplier.

If that is not enough of a challenge, the supermarkets are also unreliable retail customers and the number of independent retailers around Australia is shrinking.

Timing right for takeover
The headwinds in the retail market were acknowledged in Pacific Brands half-year results released on February 16, when David Bortolussi, the company’s CEO, noted wholesale sales were flat and growth was being driven by its own store network.

In the latest half, wholesale sales dipped from 66 per cent of total revenues in 2015, to 61 per cent this year. This compared with a four per cent lift to 32 per cent in sales from Pacific Brands’ own 333-store network and a one per cent increase to seven per cent in online sales.

The trend line is instructive, with no growth in the latest half in wholesale sales, against a 24 per cent lift in revenues from Pacific Brands’ own stores and, although off a low base, a 35 per cent increase in online sales.

Pacific Brands added 100 retail outlets in the latest half, 66 of them activewear concession sites in Myer department stores, consistent with the company’s growth strategy to expand into more concessions.

Pacific Brands’ retail focus has been critical to the tentative recovery in profitability for the company, helping to strengthen margins and to allow it to run complete range concepts.

Pacific Brands posted an 8.6 per cent increase in sales for the latest half, to $425.3 million, with net earnings of $24.3 million.

For the full financial year in 2015, Pacific Brands recorded a $97.7 million net loss after recovering somewhat from a loss at the halfway point of that year of $120 million.

The more promising trading results in the latest half follow five years of restructuring that has included a culling of close to 300 brands and divestment in 2014 of its footwear division to Anchorage Capital, and workwear division to Wesfarmers.

Pacific Brands’ focus on expanding its own retail store network has underpinned substantial growth in its two core brands, Bonds and Sheridan.

The Bonds business has increased sales by 40 per cent in the past three years and the retail stores posted a 22 per cent like for like growth in the latest half.

The underwear division, which includes popular brands such as Bonds, Berlei, Explorer and Rio, contributed $269 million of the company’s total $425 million revenues for the latest half.

Sheridan chipped in a further $105 million, representing a 10.2 per cent increase over 2015, underpinned by nine per cent like for like growth in retail stores.

Bonds has 155 stores, while Sheridan has 170, including 107 concessions stores in David Jones in Australia and predominantly in Debenhams and House of Fraser in the United Kingdom.

In recommending the takeover bid to shareholders, Pacific Brands chairman, Peter Bush, said the two companies, “shared a number of similarities, including shared values and a focus on leading brands, design, innovation and quality”.

Bush said the US suitor would provide Pacific Brands with, “additional scale, sourcing benefits, financial flexibility and the opportunity to accelerate the growth of iconic brands”.

Bush said the takeover was expected to have limited impact on the company’s Australian operations and employees with HanesBrands confirming it intends to retain the management team that has completed the restructure.

HanesBrands’ retail pedigree
HanesBrands is a publicly listed company in the US, with $7 billion in sales and a presence in 40 countries. Headquartered in North Carolina, HanesBrands has had a beachhead in Australia since March 2011, when it acquired the Melbourne-based TNF Group, which marketed the Performax, Leluu and Track ‘N’ Field brands.

TNF had also been a licensed partner for HanesBrands’ Champion label since 2009, while the Hanes underwear and Playtex, Lovable and Wonderbra brands have also been sold in Australia.

HanesBrands’ first quarter results released last month showed modest sales, consistent with flatlining revenue growth in its business over the last several years.

Sales for the American underwear and activewear supplier in the latest quarter increased just one per cent, despite five international business acquisitions in the past three years, which places Pacific Brands as the sixth takeover target.

While revenue growth has been modest, HanesBrands has increased earnings threefold, capitalising on supply chain synergies achieved from integrating the five recent international acquisitions.

In a statement issued last week, HanesBrands said it would create significant value by supporting Pacific Brands’ growth strategy while leveraging its global supply chain.

Richard Noll, HanesBrands’ chairman and CEO, said Pacific Brands was a “natural addition” to the American company’s portfolio with its strong market leading brands, including Bonds, Berlei and Sheridan.

Noll said Pacific Brands’ Tontine pillow and Dunlop flooring business, which represent around 12 per cent of sales and earnings, would be divested.

The HanesBrands takeover offer measures up as a reasonable deal, given the rocky history of Pacific Brands with its lost capital value as well as trading losses and writedowns of more than $1.5 billion in recent years.

For the American company, there are indications that Pacific Brands has turned the corner after its bleak years as a result of its strategic shift in the weighting of its business from wholesaler to retailer.

Improved half-year results and the expectation of a $75 million profit for the full 2016 financial year might cause a few shareholders to pause momentarily on accepting the takeover bid. But an appetite for the risks of holding on and rejecting the HaneBrands bid is unlikely.

HanesBrands can certainly reduce supply chain costs and, as a global supplier, has a significantly greater chance than the standalone Pacific Brands in stemming the losses of wholesale customers and of shoring up growth through higher levels of investment in brand marketing and continued expansion of the store network.

HanesBrands could also create new market opportunities for brands in the Australian company’s portfolio.

The formal takeover bid followed almost four months of discussions between the American and Australian companies. And with a sell recommendation to shareholders from the Pacific Brands board, the deal is expected to pass muster with both shareholders and the Australian Foreign Investment Review Board.

The takeover is expected to be consummated, after the close of the 2016 financial year.

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