Gildan board can’t be trusted to oversee sales process, top shareholder Browning West says

Opposition is springing up against efforts by Gildan Activewear Inc.’s GIL-T board of directors to find a suitable buyer for the Canadian clothing maker.

Browning West, a California-based investment firm with a roughly 5-per-cent stake in Gildan, says the apparel company’s move to initiate a sale process is an attempt by current directors to dodge their day of reckoning at an annual meeting scheduled for May 28. The firm is leading a campaign by dissident investors who want to replace Gildan’s current board and bring back former chief executive Glenn Chamandy.

“Since the onset of our campaign, we have maintained that Gildan is a high-quality business with significant latent earnings power and strong value creation potential under the right board and management. We are naturally concerned that the board has initiated a sale process in order to avoid accountability,” Browning West said in a statement released Wednesday.

Gildan recently received a takeover approach from an unnamed buyer and subsequently gave investment banks RBC Capital Markets and Goldman Sachs Group Inc. a mandate to look for additional bidders, The Globe and Mail reported Tuesday. The company later confirmed publicly that several potential buyers have expressed an interest in considering a friendly deal with Gildan but that there’s no certainty a transaction will result from the discussions.

The spectre of a sale has raised the stakes in what has so far been a clash over leadership and casts it in a new light. Browning West and several other shareholders in Gildan are thinking about the company’s value over several years and are unlikely to support an offer that doesn’t come with a sizable premium. For its part, the board faces pressure to do what’s in the company’s best long-term interests, rather than accepting a bid to deflect investor anger over its decision to dismiss Mr. Chamandy.

At least three U.S. private equity funds are each currently trying to raise up to US$5-billion in debt from banks and bond markets to fund a Gildan takeover, according to two sources who spoke to The Globe, as well as information gathered from documents that would-be bidders are sending to banks as they attempt to line up loans. The Globe is not naming the sources because they were not authorized to speak publicly about the situation.

Potential bidders for Gildan include Boston-based Bain Capital, which has made a number of successful investments in Canadian consumer product companies, and Sycamore Partners, a New York-based private equity fund that specializes in retail and consumer businesses, the sources said. Berkshire Hathaway, which owns Gildan rival Fruit of the Loom, and private equity firm Clayton Dubilier & Rice, which owns S&S Activewear, a large apparel distributor in North America, could also be in the mix, according to Stifel Financial Corp. analyst Martin Landry.

Gildan shareholders may be frustrated by this turn of events and may not support a takeover scenario at this point, Mr. Landry wrote in a note to clients. “Some may argue that this quick profit undermines the long-term value of the company and that in the medium-term, upon strong execution, the share price could surpass the near-term takeover price.”

The analyst estimates shareholders supporting the return of Mr. Chamandy would require a minimum 30-per-cent premium to the stock’s 20-day volume-weighted average price, meaning an offer price of US$45 per share. The Globe spoke with senior representatives for two dissident shareholders who suggested the minimum is more in the range of US$50.

Gildan shares were up 2 per cent to US$38.06 in trading on the New York Stock Exchange Wednesday.

In a letter to Gildan’s board in December, Browning West said Mr. Chamandy built Gildan into a dominant business with a strong culture and market position, derived primarily from low-cost manufacturing and vertically integrated operations. It said it believes that under his leadership, Gildan’s share price was poised to be worth US$60 to US$80 over the next two years.

Gildan has been engulfed in an intense power struggle since December, when it let go Mr. Chamandy, its then-chief executive officer, after 20 years as CEO. The company named former Fruit of the Loom executive Vince Tyra as his replacement.

Gildan’s board insists it was entirely justified in sacking Mr. Chamandy, saying it had gradually lost faith in his ability to lead the company. Investors, however, were taken aback by the C-suite switch. Several of them have said the board failed in its duties because it abruptly terminated a proven CEO and installed a replacement who is not qualified for the job.

Led by Browning West, nine dissident investors holding an estimated 35 per cent of Gildan’s stock have called publicly for Mr. Chamandy’s reinstatement. Many of these shareholders, including Montreal-based investment management firm Jarislowsky Fraser, also back a new slate of eight directors proposed by Browning.

News that Gildan might be sold underscores the need for an immediate reconstitution of the board, even before the annual meeting, Browning West said in its statement Wednesday. It wasn’t immediately clear how the firm intends to accomplish that goal.

“Our slate clearly has substantial shareholder backing and is focused on maximizing long-term shareholder value, compared to the current ‘lame duck’ board, which is poorly positioned to evaluate any offers for the company,” Browning West said. “Under no circumstances can the current board be trusted to oversee a sale process.”

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