Hanesbrands to acquire Gear For Sports using cash flow, will assume $170 million of debt

By Paul Deckelman

New York, Aug. 10 - Hanesbrands, Inc. said Tuesday that it has agreed to acquire GearCo, Inc. for $55 million in cash for the shareholders' equity in the privately held apparel company, plus the assumption of approximately $170 million of GearCo debt.

The acquisition of GearCo - which under the name Gear For Sports sells licensed logo apparel like T- shirts and sweatshirts through college bookstores and other channels - should have no impact on Hanesbrands' own debt levels, since the Winston-Salem, N.C.-based maker of men's, women's and children's underwear, hosiery and activewear said in a statement that it plans to fund the acquisition via free cash flow. It continues to project a previously announced debt-to-EBITDA leverage ratio for 2010 of about 3.5 times on a pro-forma basis.

Free cash flow to fund deal

Hanesbrands' executive vice president and chief financial officer, E. Lee Wyatt Jr., told analysts on a morning conference call that the total $225 million acquisition and debt assumption is "funded nicely from free cash flow."

Wyatt predicted that the acquisition will likely close sometime during the fourth quarter and noted that "generally the largest piece" of Hanesbrands' cash-flow generation takes place late in that fourth quarter, "so we'll use our revolver to make the acquisition, and as cash flow comes in throughout the fourth quarter, then we'll pay that down."

According to its most recent 10-Q report filed with the Securities and Exchange Commission, as of the end of its fiscal second quarter on July 3, Hanesbrands had drawn $187 million of its $400 million of revolver availability.

Wyatt said that GearCo has bonds outstanding carrying an interest rate of over 10% right now. He believes that there is a redemption price of 101 on the bonds, with no significant other prepayment charges or expenses associated with that debt.

Better than buying back its own debt

Company executives said that paying $225 million to acquire GearCo and assume and ultimately retire its debt is a more efficient way of boosting Hanesbrands' earnings per share than using that money to pay down the company's own debt.

At the end of the second quarter, Hanesbrands was carrying about $2 billion of debt on its balance sheet, including the $187 million outstanding under the revolver, $500 million of 8% senior notes due 2016, $490 million of floating-rate senior notes due 2014 and $691 million of term loan debt due 2015, as well as a $132 million accounts receivable securitization facility that matures in December.

Hanesbrands' chairman and chief executive officer, Richard A. Noll, told the analysts that "if we use that $225 million to pay down debt at the end of this year, it would add about 10 cents of EPS to us next year. If we use that $225 [million], as we're now going to use, to buy Gear, it adds 20 cents next year, which grows to 30 cents the year after."

Hanesbrands expects to realize that accretion through synergies between its own operations and those of Lenexa, Kan.-based GearCo, which already sells Hanesbrands' own Champion-branded apparel under license. It anticipates being able to lower GearCo's production costs by using its own supply chain to provide it with T-shirts, sweatsuits, shorts and other clothing items, while using GearCo's graphic prowess in printing images on apparel to broaden its own product offerings.

"This fits right in the heart of our acquisition criteria, we've been consistent about that," Noll declared. "It's a great deal for shareholders - what better way to use our cash flow than to leverage the growth platform that we've just built? Clearly, it's a great way to add earnings per share to us in 2011, 2012 and beyond."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.