The big dog in Quebec capital markets just marked its turf.
On Wednesday, the Caisse de dépôt et placement du Québec didn’t just loan Montreal-based Gildan Activewear Inc. GIL-T $200-million. The asset manager with a mandate to contribute to the province’s economic development also ensured it will be a kingmaker, with the fate of a leading global clothing manufacturer hanging in the balance.
In making its investment, the Caisse picked a side in an increasingly acrimonious fight for control of Gildan’s board.
The fund manager also signalled it intends to play a continuing role in the company if – and this is a big if – Gildan gets sold to one of the U.S. private-equity funds that have been circling the company since early this year.
The Caisse made its intentions clear though a series of caveats that came with its Gildan investment.
To land a loan that pays a competitive 6-per-cent interest rate, Gildan committed to keeping its head office in Quebec for the next seven years. And after clashing with the clothing manufacturer over its tax strategy and selling a significant stake in Gildan two years ago, the Caisse won the company’s commitment to pay global minimum tax rates.
In return, the Caisse endorsed Gildan’s beleaguered board of directors and chief executive officer Vince Tyra, who faces an activist challenge from asset manager Browning West. The Los Angeles-based fund wants to elect its own slate of directors and put Gildan co-founder and former CEO Glenn Chamandy back in the driver’s seat.
Shareholders will vote for directors at the May 28 annual meeting, and right now, the contest is too close to call.
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This is shaping up to be the most expensive governance battle in Canadian history, outstripping Pershing Square Capital Management’s successful 2011 campaign for board seats at what’s now railroad Canadian Pacific Kansas City Ltd. CP-T
At the end of March, when Gildan released financial results, the company had already spent $20-million on advisers in this boardroom battle. To put that number in perspective, Walt Disney Co. handed its advisers about US$40-million after winning a months-long showdown with activist Nelson Peltz.
Along with an endorsement of the current Gildan board, the Caisse’s $200-million loan signals the fund manager wants a role in a potential takeover.
This winter, Gildan launched a sales process after receiving an unsolicited offer. As recently as late April, the board said it was still negotiating with potential buyers. It promised to update investors at an annual meeting this month.
No board would welcome additional debt – more leverage, in the Street’s lingo – if it hoped to announce a leveraged buyout by a private-equity fund. And borrowing a lot of money is critical to any Gildan takeover.
It’s worth noting Browning West and several significant shareholders in Gildan say the wholesale rejigging of the board that played out in late April points to a failed auction.
Right now, Gildan has relatively little debt, with $1.1-billion in loans. Bankers call this a lazy balance sheet.
Potential private-equity buyers plan to bulk up that balance sheet by borrowing at least US$4-billion to fund a takeover that would cost roughly US$8-billion, according to documents obtained by The Globe and Mail. Within five years, the company’s projected cash flow would allow Gildan to retire US$3-billion of these loans.
Over the past year, higher interest rates and tighter credit markets have crimped private-equity deal-making. Leverage buyout loans, at attractive rates, are increasingly hard to find. Any fund manager interested in snapping up Gildan would welcome a deep-pocketed backer such as the Caisse, if that buyer can get comfy with its Quebec-first focus.
Two of the private-equity funds circling Gildan – Boston-based Bain Capital and Sycamore Partners, which is headquartered in New York – have a history of successful investment in Quebec, and friendly relationships with the province’s $434-billion fund manager.
In 2003, Bain partnered with the Caisse and the founding Bombardier family to acquire Ski-Doo maker BRP Inc. Two years ago, Sycamore acquired the Boucherville, Que.-based Rona home improvement chain from Lowe’s. The Caisse used to be a significant investor in Rona.
Until Wednesday, the Caisse had no role in a boardroom battle for a global consumer product company that just happens to be based in Montreal. A $200-million loan grants the Quebec fund manager a seat at the table.