Takeaway: This is why Reporters should not pose as Analysts. Highly unlikely that VFC touches HBI for so many reasons.

If you saw that Bloomberg story about HBI being a good strategic fit for VFC, you should ignore it. The logic is very flawed. This is why reporters should not try to be analysts. Here’s why…

  • True, it’s been a while – five years to be exact – since VFC (a serial acquirer) has done it’s last deal. That was Timberland for $2bn.
  • But there’s a reason why it’s been 5 years. VFC is extremely valuation-focused. Multiples have been inflated in the 3 years since it integrated Timberland, so it’s been out of the game. Whether we’re at the end of an economic cycle or not (we probably are), the reality is that VFC THINKS we are. It won’t step up deal flow at these multiples with earnings at risk.
  • There’s another key consideration. Circa 2007 with the sale of Vanity Fair, VFC sold out of the last of its intimate apparel brands at a 4x EBITDA multiple. It wanted out of the commodity-priced brands that owned its own manufacturing assets. Why in the world would it acquire HBI, which is exactly what it exited (but on a much larger scale)? HBI bought Maidenform in 2013 at 9.5x EBITDA.  VFC did not want it then (at that price) and it almost certainly does not want it now.
  • Does VFC want to acquire its way into Wal-Mart and Target? Seriously?
  • HBI itself has been on an acquisition tear – buying underwear assets for up to 12.5x EBITDA. They’re doing this all while the CEO (otherwise young at 58) is exiting the business.
  • It bought Pacific Brands in Australia – a big deal at $800mm. Our view on Australia is that the economy is at considerable risk of a consumer collapse as the ability to tap into home equity evaporates. The average underwear replacement cycle for dudes is about 7-years. As gross as that may be, in a consumer downturn it can stretch to an even nastier 10 years. That means sales and margins come down for anyone selling the stuff. HBI could prove, in the end, to have paid 20x or higher for this asset – one that we don’t think is scalable beyond Australia.
  • We think Pacific Brands management knew this. It was shopped and sold well before it was bought. HBI was the highest bidder. VFC knows this. HBI knows this. That is one reason why the CEO is stepping away.
  • Bottom line – not going to happen.
  • We’ll present our HBI thesis in a detailed slide deck on September 14th.

HBI | Why Bloomberg is So Wrong on a VFC/HBI Deal - HBI mult with gildan chart1

HBI | Why Bloomberg is So Wrong on a VFC/HBI Deal - 9 8 2016 VFC ACQUISITIONS chart2