Navigating the Dynamic M&A Landscape in the Sports Apparel Industry

The mergers and acquisitions (M&A) landscape in the sports industry has remained notably active and attractive to investors, driven by continuous digital transformation and global franchise investments. Since 1985, the sports industry has recorded 5,724 M&A transactions, amounting to $1.7 trillion, highlighting a sustained growth trajectory. However, fluctuations in deal activity have occurred in more recent years. In 2022, the volume of deals decreased by 7%, with 263 deals closed worth more than $30.5 billion. This trend continued in 2023, with a further 15% reduction in the number of deals (223) and a 26% decline in deal value at more than $22.6 billion.

On June 5, HanesBrands and Authentic Brands Group sought to buck the trend as they announced HanesBrands will sell its Champion brand to Authentic Brands Group. The agreement involves the sale of intellectual property and certain operating assets of Champion for $1.2 billion, with a potential increase to $1.5 billion through an additional contingent cash consideration based on performance thresholds. These types of potential purchase price escalators are often referred to as “earnouts.”

In the M&A context, earnouts help in negotiations to close the gap in purchase price between buyer and seller. But oftentimes, these arrangements come with a specific set of risks and challenges. For example, each party may favor a different metric for measuring the acquired company’s financial performance, i.e., a seller may prefer performance be measured on revenue versus income due to the seller’s limited control over the acquired company after the close of the transaction. Additionally, a buyer’s strategic plans for the acquired company may not fully align with the seller’s performance objectives in the earnout. Consequently, special care must be used to negotiate the earnout provision to ensure the parties understand the arrangement and their respective interests are adequately protected.

For those on the sell side, it is important that such earnouts are negotiated with a realistic understanding of the likelihood of hitting such targets. For example, when crafting earnout language, sellers would be wise to include parameters and guardrails around the operations of a business during the earnout period and a right to conduct an “audit” of the buyer’s calculations of the target.

For those on the buy side, it is important that their investment remains protected. For example, a buyer should seek to protect its ability to operate the business as it deems necessary in the future and be sure to align the earnout targets with the overall value proposition of the transaction.

Authentic Brands Group, known for its expansive portfolio in brand development, marketing, and entertainment, helps bolster its presence in the sports, lifestyle, entertainment, and media sectors with its purchase of the Champion brand. With this acquisition, Authentic’s system-wide annual retail sales are projected to exceed $32 billion worldwide. Chairman and CEO of Authentic Brands Group, expressed enthusiasm for the acquisition, highlighting Champion’s pioneering spirit and its significant contributions to athletic wear since its inception in 1919. The brand, renowned for innovations like the hooded sweatshirt and breathable mesh fabrics, continues to command global appeal, operating in over 90 countries.

To help synergize this deal with the rest of its business, Authentic Brands Group plans to leverage its extensive platform to transition Champion into a licensed model, engaging with various operators to manage manufacturing, retail, e-commerce, and wholesale operations, thereby maintaining Champion’s global footprint. By licensing the brand, Authentic Brands Group can create various streams of revenue through specific product categories, territories, and terms. The acquisition, subject to standard closing conditions including regulatory approval, is expected to finalize in the second half of 2024. Post-deal, HanesBrands will continue to provide transition services for Champion in select regions, with net proceeds from the transaction estimated at about $900 million.

The M&A market’s fluctuating dynamics underscore the importance of understanding the legal intricacies of each deal to secure the best outcomes. For financial services professionals and potential clients, staying informed about these trends and developments is crucial. By maintaining a keen awareness of market shifts and strategic transactions, stakeholders can better navigate the complexities of the M&A landscape, ensuring informed decisions that align with broader investment and business goals.

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