Pacific Brands Headed For The US

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-Recognises turnaround in key assets
-Suggested sale of Dunlop Flooring, Tontine
-Large synergies expected
 

By Eva Brocklehurst

A takeover of Pacific Brands ((PBG)) is considered highly likely to proceed, following a strong bid from HanesBrands, a US-based apparel business with a similar offering.

Brokers expect the considerable synergies on offer will ensure the bid goes ahead. Citi calculates a 26% premium to the three-month average price of the stock and a 45% premium to comparable global acquisitions. A 9.4c special dividend, fully franked, is proposed by Pacific Brands, to be paid upon completion of the deal.

The company calculates eligible shareholders will receive 4c in terms of the full benefit of the franking credit. To the extent this special dividend is paid the cash consideration will be reduced.

The proposal recognises the sound work the company has done to turn the business around, Ord Minnett contends. The work is still in progress and HanesBrands plans to divest Dunlop Flooring and Tontine, identifying significant earnings upside in FY19 for the Bonds and Sheridan businesses.

The largest opportunity brokers envisage is in the supply chain synergies as the businesses leverage the global scale of HanesBrands. Ord Minnett calculates the offer represents an attractive operating earnings multiple of 12. The broker downgrades its recommendation to Hold from Accumulate, given the takeover bid matches its target of $1.15.

Could the proposal attract another bidder? UBS is doubtful, given the high implied multiple, but does not rule it out. Premier Investments ((PMV)) is the only Australian listed apparel company that could acquire something of this size.

The broker calculates Premier could generate 5.0% earnings accretion by offering $1.20 a share and still keep net debt/earnings ratio below 0.5. However, UBS expects this earnings accretion would largely be a function of increased leverage, with some potential synergies and would probably involve, at the least, some scrip.

HanesBrands currently produces the majority of its apparel in house – it owns brands such as Hanes, Lovable and Playtex – while Pacific Brands uses external manufacturers. This is key to the bidder's belief it can use manufacturing efficiency to drive down average unit costs. This could potentially drive substantial synergies between the two businesses.

The offer is solid, Deutsche Bank agrees, noting the significant improvement in Pacific Brands after assets were divested and the balance sheet was placed in a net cash position. The company's retail strategy produced like-for-like sales of 22% over the first half. The broker considers Pacific Brands to be a multi-year turnaround story with he first benefits only coming to fruition in FY16, given the upgrade to the company's guidance at the first half result.

The broker envisages upside risk to that forecast and believes its forecasts are conservative when it comes to the assessment of the success of Bonds and Sheridan in both the retail and wholesale channels.

HanesBrands expects that it can growth Pacific Brands sales at mid to high single digits, which is above Deutsche Bank's assumptions. The broker does not capture any option for additional scale through M&A in its forecasts, adding that this is the clear attraction for HanesBrands in the acquisition.

The Pacific Brands board has unaniminously recommended to bid in the absence of superior proposal and the independent expert's report. Shareholders will have the chance to vote at a scheme meeting in June.

There is one Buy rating (Deutsche Bank) and three Hold on FNArena's database. The consensus target is now $1.13, suggesting 2.4% downside to the last share price.
 

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