Coats Group Plc has reportedly reached a definitive agreement to acquire U.S.-based footwear insole maker OrthoLite for $770 million, including debt. The acquisition is reportedly designed “to accelerate the London-based thread manufacturer’s ambition to become a leading supplier of materials to the footwear industry.”

“The combination of Coats and OrthoLite is fantastic news for both companies and for the footwear industry,” said David Paja, CEO of Coats Group PLC. “It brings together two global leaders in adjacent segments of the footwear components sector with a shared vision for innovation and sustainability and with unparalleled brands and customer relationships. We look forward to working with Glenn Barrett and the OrthoLite team, leveraging our combined strengths to reshape the future of the footwear components industry.”

Glenn Barrett, founder and CEO of OrthoLite, added, “I’m excited to merge OrthoLite, the footwear innovation business that I founded 28 years ago, with Coats Group Plc. This alliance forms a powerful partnership of industry leaders to provide a platform for OrthoLite and Cirql to continue to serve our customers with the most innovative and sustainable footwear components in the world.”

Coats said OrthoLite, founded in 1997, is “the global market leader in open-cell foam insoles with a 36 percent share of the addressable market.” OrthoLite reports that the company “supplies over 500 million pairs of insoles a year to around 550 brand customers and has more than 310 co-branding agreements.”

“It operates in an attractive, fast-growing segment of the footwear market with strong tailwinds for growth as brands increasingly adopt open-cell technology due to its superior benefits in terms of comfort, performance and sustainability,” Coats added.

OrthoLite also has a strategically located global footprint of 14 production facilities, providing operational flexibility.

The acquisition also includes Cirql, a newly developed proprietary foam technology targeting the midsole market with a biodegradable (or fully recyclable) offering. Coats said, “Cirql is at an early stage of commercial development, with over $30 million invested to date, and the technology is secured by over 80 patents.” Under Coats’ ownership, Cirql’s “commercialization plan will be further developed.”

Ongoing operating costs for the team are expected to be $1.5 million per quarter, enabling a break-even position by 2026. As part of the transaction terms, the estimated costs to deliver Cirql to profitability were deducted from the consideration paid to the seller.

Strategic Fit
Coats said the acquisition “accelerates Coats Footwear division’s strategy to create a ‘super tier 2’ supplier in footwear components, strengthening its product offering to brands through the entry into the attractive, fast-growing open-cell premium insole segment of the market.”

Based on results to December 31, 2024, the enlarged Coats Footwear division has pro-forma revenues of $700 million. Coats’ footwear division reported £403 million ($503 mm) in revenue for fiscal year 2024, according to the company’s annual report.

Coats said the acquisition also “improves the overall quality of Group earnings, shifting the balance towards its high growth, high margin footwear segment.”

Coats added, “OrthoLite has strong similarities with Coats due to its customer base, route-to-market, focus on quality, innovation and sustainability, and global operational footprint. The combination provides exciting potential commercial opportunities to deepen customer relationships and accelerate growth, leveraging the combined strengths of the businesses in technology and access to customers.”

Cost Savings from Synergies
Coats said it has identified initial joint annualized cost synergies of $20 million to be delivered by 2028. Additional joint growth synergies were identified through cross-sell opportunities, the upside potential from Cirql, and the acceleration of innovation. Coats said it has a “successful track record of delivering synergies from the footwear acquisitions of Texon and Rhenoflex in 2022.”

Attractive Financial Effects
Coats said OrthoLite has a “strong track record of growth (8 percent revenue CAGR 2019-24) and strong profitability (26 percent EBIT margin in 2024).”

According to Coats’ documents, OrthoLite generated sales of “$258 million in 2024, up 18.9 percent from $217 million in 2023.” OrthoLite’s annual sales peaked at “$278 million in 2022 during the COVID pandemic after reaching $241 million in 2021 and $176 million in 2020.” OrthoLite’s adjusted EBITDA margin was “28 percent in 2024, 26 percent in 2023, 24 percent in 2022, 20 percent in 2021, and 26 percent in 2020.”

Coats said the acquisition is accretive to Coats’ EBIT margins (a 200-basis-point margin enhancement from 2028 onwards post synergies) and EPS accretive to Coats from the first full year. ROIC (return on invested capital) is expected to exceed WACC (weighted average cost of capital) by 2028. Coats further noted that OrthoLite has “an attractive operating cash conversion of more than 90 percent over the last three years, which will support and accelerate Coats’ free cash flow growth over the medium term.”

Coats continued, “Alongside the acquisition’s attractive returns, the transaction also accelerates the delivery of Coats’ existing medium-term targets.”

Transaction Terms
Under the terms of the transaction, Coats has agreed to pay an initial enterprise value of $770 million, representing a multiple of 10 times enterprise value to EBITDA (earnings before interest, tax, depreciation, and amortization). The price multiple is reduced to less than eight times on a post-synergy basis, including $20 million in initial joint annualized cost synergies to be delivered by 2028.

A further payment of up to $10 million will be payable based on potential EBITDA performance in 2025. Coats has also agreed to pay the current owners of OrthoLite a royalty of 5 percent on future sales of products using the newly developed Cirql technology over the next five years.

The acquisition is expected to be funded through a combination of new debt facilities and an equity placing of up to 19.99 percent of Coats’ issued share capital. The equity placing will be launched via an accelerated bookbuilding process, followed by a separate offer to retail investors. Coats said that with the debt offering, “its pro-forma net leverage is expected to reach 2.2 times in December 2025, falling to below 2.0 times by the end of 2026.”

The deal is expected to be completed in the fourth quarter of 2025.

Six-Month Performance Update
Coats also reported on Wednesday, July 16, first-half results, which showed revenue increased 0.2 percent to $705.4 million from $704.0 million while increasing 2 percent at constant exchange rates.

Coats said in a separate statement,” Good momentum in January-April, then following the announcement of US tariff increases, we saw a softening in demand reflecting general market uncertainty.”

Apparel and Footwear revenue grew 3 percent and 1 percent,  respectively, at constant-exchange rates, while sales declined 2 percent in the Performance Materials (PM) segment.

Pretax profit totaled $111.0 million in the six months that ended June 30, rising 4.5 percent to $106.2 million the year before. EBIT on an adjusted basis improved 5.3 percent to $140 million from $133 million and grew 7 percent on a currency-neutral basis, with margins improving to 19.8 percent from 18.9 percent.

Coats said the adjusted margin was within the 19 percent to 21 percent medium-term target range, driven by the Apparel and PM segments, with a “strong” Footwear margin maintained.

Highlights of the six-month performance include further gains in market share for Apparel and Footwear, the completion of Coats’ exit from the North American Yarns business and an accelerating margin recovery in the Performance Materials segment.  Coats also said sales in its 100 percent recycled thread products increased 73 percent in the half to $269 million.

Coats said its full-year outlook remains unchanged and aligns with current market expectations, with expected continued market share gains in Apparel and Footwear as well as a strong operating margin performance. The company also expects its free cash to further increase in the second half and into 2026.

Commenting on the first-half update, Coats’ CEO Paja said, “I am really pleased with the Group’s performance in my first full reporting period as CEO. We have outperformed our markets, achieving top-line growth in a period of significant external uncertainty due to tariffs, and delivered our medium-term margin target in advance of plan.

“We have continued to improve the quality of our portfolio, completing the exit from US Yarns, and made further progress against our strategic enablers. This includes increasing our revenue from 100 percent recycled thread products by 73 percent and delivering 30 percent growth in the attractive market adjacencies we set out earlier in the year.

“We are fundamentally reshaping the quality and growth profile of the Group by expanding into the growing insole segment of the footwear market with the agreed acquisition of OrthoLite for an enterprise value of $770 million. This exciting acquisition of a high-quality, margin accretive business further consolidates our leadership position in footwear components, bringing into the Group a business with deep brand relationships, a complementary market-leading portfolio and a business model that is very similar to our own. We are in an excellent position to create value from this combination by accelerating innovation and realising the exciting growth synergy opportunities it provides.

“Coats is a global market leader with a high-quality portfolio, improved structural exposure to higher growth segments, and a best-in-class global footprint that enables responsiveness to customer needs. Taken together, we are excited about the Group’s growth, margin and cash generation potential over the medium term. I am proud of what our teams have accomplished so far this year and view the rest of the year with confidence despite the continuing macro uncertainties.”

Image courtesy Ortholite