Navigating the dynamic M&A landscape in the sportswear industry

The mergers and acquisitions (M&A) landscape in the sports industry remains particularly active and attractive to investors, driven by ongoing digital transformation and global franchise investments. Since 1985, the sports industry has seen 5,724 M&A transactions worth $1.7 trillion, demonstrating a sustainable growth trajectory. However, there have been some fluctuations in transaction volume in recent years. In 2022, transaction volume decreased by 7%, with 263 transactions valued at over $30.5 billion completed. This trend continued in 2023, with a further 15% decline in deal volume (223) and a 26% drop in deal value to over $22.6 billion.

On June 5, HanesBrands and Authentic Brands Group tried to buck this trend by announcing that HanesBrands would sell its Champion brand to Authentic Brands Group. The agreement includes the sale of Champion’s intellectual property and certain operating assets for $1.2 billion, with a potential increase to $1.5 billion through additional contingent cash consideration based on performance thresholds. These types of potential purchase price escalators are often referred to as “earnings.”

In the context of mergers and acquisitions, earnings aid in negotiations to close the purchase price gap between buyer and seller. Often, however, these arrangements come with a specific set of risks and challenges. For example, each party may prefer a different metric for measuring the target’s financial performance, i.e., the seller may prefer to measure performance on a revenue versus earnings basis due to the seller’s limited control over the target after the closing of the transaction. Additionally, the buyer’s strategic plans for the acquired business may not fully align with the seller’s earnings performance goals. Therefore, particular care should be taken when negotiating a remuneration provision to ensure that the parties understand the agreement and their interests are adequately protected.

For those who are willing to sell, it is important that such earnings are negotiated with a realistic understanding of the likelihood of achieving such goals. For example, when crafting earnings language, sellers would be wise to include the parameters and barriers that govern the company’s earnings during the earnings period and the right to “audit” the buyer’s target calculations.

For those on the buy side, it is important that their investment is protected. For example, the buyer should seek to protect its ability to operate the business in the manner it deems necessary in the future and ensure that the earnings target is consistent with the overall value proposition of the transaction.

Authentic Brands Group, known for its expansive brand development, marketing and entertainment portfolio, is helping to strengthen its presence in the sports, lifestyle, entertainment and media sectors with the acquisition of the Champion brand. With this acquisition, Authentic’s systemwide annual retail sales are expected to exceed $32 billion worldwide. The president and CEO of Authentic Brands Group expressed enthusiasm for the acquisition, highlighting Champion’s pioneering spirit and its significant contributions to sportswear since its founding in 1919. Known for innovations such as the hoodie and breathable mesh fabrics, the brand continues to enjoy a global reputation as an appellation operating in over 90 countries.

To help synergize this agreement with the rest of its business, Authentic Brands Group plans to leverage its extensive platform to transition Champion to a licensed model, working with various operators to manage manufacturing, retail, e-commerce and wholesale, thereby maintaining Champion’s position global footprint. By licensing a brand, Authentic Brands Group can generate different revenue streams within specific product categories, territories and conditions. The acquisition, subject to standard closing conditions including regulatory approval, is expected to close in the second half of 2024. Post-transaction, HanesBrands will continue to provide transition services to Champion in select regions, with net proceeds from the transaction estimated are at around USD 900 million.

The changing dynamics of the M&A market underscore the importance of understanding the legal intricacies of each transaction to ensure the best results. For financial services professionals and potential clients, keeping track of these trends and changes is crucial. By maintaining a keen awareness of market changes and strategic transactions, stakeholders can better navigate the complex M&A landscape, ensuring informed decisions that are consistent with broader investment and business goals.