Is Gildan Activewear Inc. GIL-T worth US$42 a share? That’s the question investors are now pondering as the months-old leadership squabble at the Montreal-based T-shirt and apparel maker takes a new turn.
The answer to Gildan’s valuation is potentially lucrative, given that the share price was struggling to rise above US$38 in New York this week (the shares also trade in Toronto in Canadian dollars).
That’s US$4 below the price that what was floated by observers in a Globe and Mail piece this week. The story broke the news that Gildan had been approached by a potential buyer, following a three-month ordeal that involved the dismissal of the company’s chief executive officer, Glenn Chamandy.
That means there’s a potential gain of 13 per cent on a successful takeover, based on Friday midday trading. But this trade comes with risk. For one thing, there is no official price tag – well, not yet anyway.
The company has handed RBC Capital Markets and Goldman Sachs Group the task of searching out additional bidders to maximize the value of a transaction, according to the article’s sources. The Globe and Mail did not name the sources because they are not permitted to speak publicly on the matter.
Gildan, according to the article, has also hired Canaccord Genuity Group to advise it on whether incoming bids represent fair value for shareholders. The price, according to one source in the Globe article: At least US$42 a share, which would value Gildan at more than US$7-billion.
The price happens to be near Gildan’s recent high point. The shares popped above US$40 in November, 2021, rising as high as US$43.20 on Nov. 16. They last traded above US$40 in February, 2022, before inflationary pressures weighed on demand for cotton tees.
The share price dipped as low as US$31.32 in January of this year, after Gildan’s board in December dismissed Mr. Chamandy from his position as CEO over succession and strategic issues, setting in motion a period of uncertainty for investors. Some institutional shareholders want Mr. Chamandy reinstated.
“Over the last few months, Gildan’s leadership battle has created noise, and the voting result of its shareholder meeting, set to be held on May 28, remains an overhang on the stock,” George Doumet, an analyst at Bank of Nova Scotia, said in a note this week.
The US$42 takeover figure also lines up with a recent estimate from an analyst of where the stock should trade.
In a February report, released after Gildan released its fourth-quarter financial results, Canaccord analyst Luke Hannan raised his target price to US$42 from US$37 previously. A target price is an analyst’s estimate of where a stock will trade within 12 months.
“We believe Gildan’s low-cost manufacturing footprint, healthy free cash flow generation profile, and attractive valuation creates a favourable long-term risk/reward profile for its shares,” Mr. Hannan said in his note.
The analyst argued that the stock deserves to trade at a higher valuation. Specifically, his target price assumes the shares can trade at 14.1 times his 2024 estimated earnings per share, up from a previous valuation of 11.9 times estimated earnings.
Mr. Doumet, whose current target price is US$40.50, noted that the US$42 takeover price mentioned in The Globe article implies a valuation that is close to Gildan’s historical average.
He also pointed out that there are other factors that add to the company’s appeal as a takeover target: Its balance sheet has a relatively low level of debt, and an acquirer might be able to squeeze out some cost savings from Gildan’s operations.
Still, this is hardly a done deal, and there may be a couple of things to consider before betting on a swift – and profitable – resolution.
First, the Warren Buffett deal for a similar company two decades ago may have little in common with today’s Gildan.
Berkshire Hathaway Inc. BRK-B-N – Mr. Buffett’s company – bought Fruit of the Loom Inc. in 2001, suggesting that the cotton apparel business may be a compelling sector for Buffett wannabes who delight in the investor’s ability to find companies with competitive advantages.
Although Mr. Buffett outbid rivals, including Gildan, he bought Fruit of the Loom out of bankruptcy for just US$835-million. Gildan is in no such distress.
The second note of caution is that Gildan shareholders could easily balk at a bid. The stock clearly has been struggling through temporary leadership uncertainties that the board created when it dismissed Mr. Chamandy, potentially making it an awkward time to sell.
In that case, the better bet may be to look beyond the short-term gain that would come from a takeover and instead focus on Gildan’s long-term prospects. If the company is a gem, it may be worth holding on to it.
David Berman