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Let’s be clear, I am not putting TBL in play, but five people have asked me over the past 30min for my thoughts on TBL as a takeover target. For others thinking the same, I’ll save you the effort…

TBL has been one of my favorites due to my expectation for an underappreciated improving free cash flow trajectory over the next 12-months with a takeout as a nice call option. As it relates to the latter, TBL makes an ideal takeover candidate by two companies in particular – Nike and VF Corp. I have no edge on who, when, or where. But I certainly can read the tea leaves as to the 'why.'
For Nike, it’s rather simple – the one business where it has consistently failed is in Outdoor. It tried for years to make its ACG business stick (All Conditions Gear), but it simply did not work. My own view is that Nike’s brand is too closely tied to a performance athlete, and an outdoor enthusiast cannot easily be wooed by the likes of Jordan, LeBron James, Tiger Woods, or Rafael Nadal.

In addition, Nike has cash burning a hole in its pocket, is seeing ROE decoupling from ROIC because it cannot reinvest capital fast enough back into the business, and probably would not mind strengthening its link with the urban consumer through the Timberland yellow boot business (which I think has bottomed) as its Jordan brand enters maturity.

Nike would want no piece of TBL when TBL still owned its money-losing US retail and apparel businesses, and was overdeploying capital into non-core assets like iPath, Go-Lite and Mion. But with retail closed, GoLite sold, apparel outsourced to PVH, and 5 of the top 6 managers cycled out over 2 years – I think this finally makes the cut for a company like Nike. The biggest negative would be that Nike would inherit a royalty agreement with PVH. Though sub-optimal, I don’t think it’d be a deal killer.

As for VFC, the driver to its business for 3 years has been The North Face, and the company has made it no secret that it is shifting away from basics (underwear biz sold) and towards the Outdoor and higher-end fashion arena. It has also not denied its interest in VFC in the past. If you were to ask me if The North Face is closer to its 1st inning of growth or 9th inning, I’d say we’re in the 7th inning stretch. VFC needs bench growth in Outdoor.

Another major call-out that matters to VFC is that capacity is very tight in Asia right now, and is only getting tighter. While large footwear brands can flex muscle and weather the storm, a smaller footwear company will have a harder time standing on its own. This means M&A makes more sense to gain leverage with factories, as well as to drive back-office synergies through cost cuts.

In addition, as I noted in my earlier post, VFC needs a deal...soon...