Pacific Brands board backs Hanes’ $1bn takeover offer

Investors will seek reassurances before accepting HanesBrands’ bid for Australian clothing maker Pacific Brands.

Bonds ambassador Iggy Azalea.

Investors will seek meetings with Pacific Brands and US suitor ­HanesBrands before deciding whether to accept a board-backed $1.1 billion bid for the maker of Bonds and Berlei underwear and Sheridan Sheets, as its shares have overshot the offer price.

The surprise bid yesterday morning would see Bonds join other storied Australian apparel brands, including Speedo, Country Road and RM Williams, offshore at a time of heightened concerns about foreign ownership.

It follows months of secret talks between the suitor and the target after Hanes adviser Goldman Sachs opened discussions with Macquarie Group on behalf of ­Pacific Brands.

Investors said the offer price — at a 30 per cent premium to the ­average of the past five days for PacBrands shares — appeared ­attractive, but they wanted reassurance from the board.

“We take a board recommendation quite seriously, but it is not the only consideration,’’ said Simon Mawhinney, portfolio manager at Allan Gray, Pacific Brands’ biggest shareholder with 15.6 per cent.

Hanes, which has grown from $US4bn in US sales to $US7bn ($9bn) of global sales over 10 years by buying leading underwear and activewear brands around the world, said it expected to increase earnings from the Pacific Brands businesses from $US56 million to $US100m in three years.

“Without Hanes leveraging off their global supply chain, Pacific Brands would not achieve that (growth) and I think that they are paying us for some of that upside early,’’ Mr Mawhinney said.

“We are probably sharing the spoils more evenly and that is exactly what you need to achieve in a transaction.’’

Hanes’s offer of $1.15 equates to 13.5 times Pacific Brands’ 2015 earnings before interest, tax depreciation and amortisation and 12 times forecast 2016 EBITDA.

Pacific Brands will also pay a 9.4c-a-share special dividend, a sum that would be deducted from the offer price but could boost returns to investors by 4c a share via franking credits.

Shares of Pacific Brands traded as high as $1.17 and closed at $1.155 yesterday, nearly 23 per cent higher for the day and a half-cent premium to the bid price.

That followed a rise of 4.4 per cent on Wednesday that made ­Pacific Brands the best performer in the S&P/ASX 200 on a down day and aroused suspicions that the deal had leaked to the market ahead of yesterday’s announcement.

The bid caps a major turnaround for Pacific Brands, which has spent much of the past five years battling costs, high debt ­levels and an unwieldy portfolio of brands ahead of a turnaround in its performance.

Successive chairmen and chief executives have overseen moves to slash the number of brands, cut debt from $846m in 2008 to just $79.2m in 2014-15 and restore earnings growth.

Chairman Peter Bush said the bid was “compelling’’ and a tribute to the work by management, led by David Bortolussi, in restructuring the business.

“There was a lot of very hard work divesting the underperforming businesses, exiting a lot of fixed costs and getting down to the nitty gritty on the core brands,’’ Mr Bush said.

“You can’t underestimate the role of David in turning this business around. He knew the business very well and really rolled his sleeves up and marshalled the team and he deserves a lot of the credit for where the company is today.”

HanesBrands, which owns the Hanes, Champion, Playtex, Wonderbra and Lovable brands, plans to leave local management in place and back the existing strategy, which includes the rollout of Bonds’ branded stores. But it will alter the back end by shifting PacBrands’ manufacturing operations into its own global network to deliver scale and efficiency benefits.

“Pacific Brands is a natural addition to the HanesBrands portfolio with its strong market-leading brands that will be complemented by our global supply chain,” Hanes chairman and chief executive Richard Noll said.

Hanes plans to sell the Tontine pillow and Dunlop flooring businesses that account for about 12 per cent of Pacific Brands’ revenue, because they are not regarded as core.

Hanes chief operating officer Gerald Evans said the target had a “top-notch management and marketing team’’ and would make a significant addition to Hanes’s worldwide portfolio.

“We believe we can make meaningful contributions to the continued execution of the Pacific Brands growth strategy and support it with our world-class low-cost supply chain,’’ Mr
Evans said. “This will also add geographic scale that will benefit our existing Champion Australia business.”

Pacific Brands has a long history of private equity interest in the company after being floated by CVC in 2003 at $2.60 a share and rebuffing a $600m approach from KKR in 2011.

In 2014 it sold the King Gee and Hard Yakka workwear brands to Wesfarmers industrial safety division for $180m, and sold its Brand Collective footwear business to Anchorage Capital, IBML and PAS Group as part of its effort to shed debt and simplify its portfolio.

“They have done what private equity would otherwise have done but under a listed company framework,’’ Mr Mawhinney said. The asset sales have shrunk revenue from $2.1bn in 2008 to just $789.7m in 2014-15, the last full-year accounts for the company if the bid is accepted.