Someone is going to make a ton of money from owning Gildan Activewear Inc.
The board of directors at Gildan GIL-T seems inexplicably determined to ensure that a U.S. private equity fund, rather than the Montreal-based clothing company’s current shareholders, cashes in on its future growth.
Mere months after going to great lengths to recruit veteran clothing executive Vince Tyra to run Gildan, one of Canada’s largest consumer product companies, the board revealed last week they have put the stock market darling up for sale, with a price tag in the US$8-billion range.
The decision has led Gildan’s institutional investors who normally keep the lowest of profiles – including Turtle Creek Asset Management and Bank of Nova Scotia-owned Jarislowsky Fraser – to mount highly public attacks on the directors.
“This board does not have a mandate, nor the confidence of Gildan shareholders, to run a process that could result in the sale of Gildan,” Turtle Creek said on Monday in a press release. “We strongly believe that the board has initiated a sale process in a desperate attempt to avoid the profound professional embarrassment that will befall the directors once they are voted off the board.”
The increasingly bitter battle between Gildan’s board and some of its largest shareholders will determine the fate of a flagship domestic business that’s made the leap onto the global stage. Many of Canada’s – and Quebec’s – publicly traded champions are already opting for private ownership.
Last week, Montreal-based Nuvei Corp. revealed it is in takeover negotiations. Over the weekend, the founder of Lightspeed Commerce Inc. – headquartered in the same city – said going private might be the best path forward. It’s a terrifying trend for equity investors big and small.
Gildan is on the auction block because the board botched succession last November when they hired Mr. Tyra, who previously led a clothing company buyout backed by Bain Capital, to replace co-founder and former chief executive officer Glenn Chamandy, aged 61.
Over four decades, Mr. Chamandy built a global business and earned outsized returns for shareholders. What he failed to do was build friendly relationships with board members. After dismissing Mr. Chamandy last fall, directors outlined concerns with his strategy and resistance to new leadership – revelations that was news to long-term investors such as Turtle Creek and Jarislowsky.
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Gildan’s board presented Mr. Tyra as the CEO who could take the business to the next level, expanding markets for high profit margin lines such as fleeces, T-shirts and the American Apparel brand, acquired out of bankruptcy in 2017. Institutional investors that own roughly a third of Gildan’s shares pushed back, launching a campaign to replace the board and bring back Mr. Chamandy.
The governance battle weighed heavy on Gildan’s share price. Against that backdrop, the board disclosed last week it received an unsolicited takeover bid earlier this year and decided to give investment banks RBC Capital Markets and Goldman Sachs a mandate to shop the company.
On Monday, Turtle Creek questioned why the board went this route.
“Just because an offer has been received does not require the board to seriously entertain it, especially when the company is in the midst of a boardroom battle,” the fund manager said. Turtle Creek said the sales process “is yet another attempt by the board to evade accountability for its actions.”
Both Gildan’s institutional investors and private equity suitors see a bright future for the company. Turtle Creek says Gildan shares, which closed Monday at US$37.39 on the New York Stock Exchange, are worth US$60.
U.S.-based fund managers Bain Capital, Clayton Dubilier & Rice and Sycamore Partners are kicking tires, according to analysts. The private equity funds forecast boosting Gildan’s sales by 50 per cent and profits by more than 60 per cent over the next five years if they win control of the company, according to investment banking sources.
The funds want to decrease Gildan’s focus on low-margin products such as socks and underwear, while ramping up new factories in Bangladesh and Honduras to expand international sales.
The path to building a better clothing company is straightforward. Fund managers such as Turtle Creek and Jarislowsky are fighting to ensure the rewards that come from growing Gildan stay with public market investors, no matter who is CEO.
Andrew Willis