CIBCHave a US$47.00 target. GLTA
EQUITY RESEARCH
December 13, 2021 Flash Research
GILDAN ACTIVEWEAR INC.
Acquiring Frontier Yarn To Push Vertical Integration
Gildan announced this morning it has acquired Frontier Yarns for $168MM in cash.
Background – Frontier produces 100% cotton, polyester, and cotton blend yarns using open end and vortex (MVS) spinning technology. The company has four facilities located in North Carolina and employs 800 employees. During 2021, 40% of Frontier’s yarn production was sold to Gildan, which the company used for textile manufacturing in Central America and the Caribbean.
Our Take – Yarn supply has been a strategic priority for Gildan for several years and the company began vertical integration ~8 years ago with substantial capital invested along the way. Yarn supply had become a particular pinch point during the pandemic as older capacity was removed and then labour supply tightened. We view the acquisition of Frontier as a good strategic fit with compelling strategic value as Gildan ramps capacity in its Central America facilities. Gildan expects to be able to achieve $35 million of synergies over three years as it harmonizes Frontier’s production. Gildan plans to invest modest capital into the Frontier assets to modernize assets over time.
Before this acquisition, Gildan was producing ~65% of the yarn it needed to supply its Central American facilities. Of the third-party supply, Frontier was supplying more than half. Post-deal, GIL will have ~90% of its yarn supplied internally and this will rise as Frontier’s existing supply agreements roll off and Gildan utilizes more of Frontier’s capacity for its own needs. We believe this effectively completes vertical integration opportunities for the Central America business, though we would not be surprised to see a similar strategy deployed in Bangladesh over time.
Gildan has been a prolific free cash flow generator in the last couple years, in large part driven by its SKU simplification work as part of its Back To Basics strategy. Net debt to EBITDA sits at 0.4x today, and this deal will add roughly 0.25x of a turn. The deal will be easily funded by cash on hand and will not affect the company’s NCIB activity