Why Hanesbrands Rocketed Higher Today

Key Points

• The Financial Times reported Hanesbrands may receive a buyout offer from Gildan Activewear.

• The final price appears to be $5 billion, including debt.

• If the deal goes south, Hanesbrands may be worth a look, as the company showed signs of life after a long decline last quarter.

• 10 stocks we like better than Hanesbrands ›

Shares of Hanesbrands (NYSE: HBI) rocketed higher on Tuesday, appreciating 27.5% as of 3:02 p.m. ET.

One doesn't normally associate an underwear manufacturer with those types of one-day gains, and indeed there was a unique news item regarding Hanesbrands today: a potential buyout offer.

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Gildan Activewear makes a bid

Today, the Financial Times reported that Gildan Activewear (NYSE: GIL), the Canada-based owner of the Gildan custom T-shirt brand and a licensor of other brands, such as Champion, was going to make a bid to acquire Hanesbrands for an enterprise value of around $5 billion, including Hanesbrand's $2.29 billion in debt.

On the news, Hanesbrand's stock rocketed higher, but its enterprise value currently sits at around $4.2 billion, roughly $800 million below the $5 billion figure thrown out by the Financial Times. So, there is still some room for the stock to appreciate for those willing to play merger arbitrage.

Image source: Getty Images.

While Gildan's stock fell on the news, the acquisition could be fortuitous for the Canadian giant if it can run Hanesbrands better than current management. Prior to today, Gildan's stock had been trading near all-time highs, while Hanesbrands has been in a multiyear downturn, with the stock down some 85% below its 2021 highs as of last week.

But Gildan may also be sensing Hanesbrands' headwinds may be ebbing. Last week, Hanesbrands beat analyst expectations for revenue and profits on its second-quarter earnings report. To give one a sense of how low expectations were, Hanesbrands eked out a meager 1.8% revenue gain, but even that was enough to get the stock moving higher by double digits following the report.

Will Hanesbrands accept?

It should be noted that there hasn't yet been a formal offer or agreement, and today's moves were entirely due to the report in the Financial Times, which is based on discussions with people familiar with the negotiations.

As it stands, unless you are an investor who engages in merger arbitrage bets, it's not clear the upside justifies the risk after today's rally. However, if the merger talks were to go south and the deal isn't consummated, Hanesbrands may be worth a look for value investors if it retreats to yesterday's levels. The company may have stabilized losses and could be slowly turning itself around even without the help of Gildan.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.