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Adidas/Reebok MergerOctober 8, 2009 Collin Shaw
Kelly TruesdaleMichael Rockette
Benedikte Schmidt
SaravananSadaiyappan
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Key Takeaways
What value does Reebok add to Adidas?
How should Adidas value Reebok and with whatsynergies?
Has the merger been a success or failure?
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Agenda
Adidas & Reebok Background
Acquisition Background
Industry Overview
SWOT Analysis
Valuation Model
Synergies
Integration Plan
Post Integration
Conclusions
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Adidas
Founded in 1926
World leader in soccer shoes
#2 behind Nike worldwide - #4 in the US
Three acquisitions before Reebok:
Company Sports Inc in 1993
Salomon in 1997 Arc'Teryxin 2002
Culture of control, engineering, and production
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Reebok
Founded in 1895
First athletic shoe for woman
#2 in US - #4 in Europe
Strong sales growth from 2002-2004
Unique portfolio of long term league licenses
Creative marketing-driven culture
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Industry Overview
One of the most competitive industries.
Over 75% of the industry controlled by brandeditems.
Large players supplier power and access toshelf space.
Small players anticipating a fashion trend.
Private label a threat.
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US Footwear Market
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Expected Trend
Expected growth rate ~9%
Change from Supply Push to Demand Pullmodel.
Blurring line between sport wear and activewear.
Demand for athleisure shoes.
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Acquisition Background
Goal: increase share in the U.S. market + bettercompete with Nike
Stock prices improved the day of announcement
Reebok sales down in fourth quarter of 2005
Deal closed on January 2006
Price: $3.52 billion
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SWOT Analysis
Strengths Adidas is strong in Europe,
Reebok is strong in US, &Asia
Complementary licensesand contracts
Reduced costs for retailers
Reebok is extremely strongin Womens wear
Weaknesses Many overlapping products
Two HQs that will be hardto integrate
Two very strong, distinctcorporate cultures
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SWOT Analysis
Opportunities Leverage combined R&D
strengths & budgets
Bring Reeboks womenswear to Europe
Reduce costs to retailers by
larger distribution networks
Ability for better reaction toglobal trends
Threats Competition between
brands employees
Cannibalization of sales
Realization of revenuegrowth synergies
Adidas may treat Reebok asa second tier brand
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Valuation Model Assumptions
Reebok WACC
Market Risk Premium 5.00%
Multiplied by: Reebok Levered Beta 1.371
Adjusted Market Risk Premium 6.90%
Add: Risk-Free Rate of Return 4.30%
Cost of Equity 11.20%
Multiplied by: Reebok Equity % 83.30%
Cost of Equity Portion 9.30%
Pre-Tax Cost of Debt 7.30%
Effective Tax Rate 30.90%
Cost of Debt 5.00%
Multiplied by: Reebok Debt % 16.70%
Cost of Debt Portion 0.80%
WACC 10.10%
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Valuation Model2000 2001 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Total Revenues 2865.24 2992.88 3127.87 3485.32 3785.28 4057.82 4349.99 4663.19 4998.94 5358.86 5744.70
Annual Growth 4.5% 4.5% 11.4% 8.6% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2%
EBITDA 216.37 221.06 247.48 288.00 333.19 323.94 350.74 379.75 411.16 445.17 482.00
Annual Growth 2.2% 12.0% 16.4% 15.7% -2.8% 8.3% 8.3% 8.3% 8.3% 8.3%
Margin 7.6% 7.4% 7.9% 8.3% 8.8% 8.0% 8.1% 8.1% 8.2% 8.3% 8.4%
Less: Depreciation 46.20 36.62 32.03 35.64 38.85 47.95 51.41 55.11 59.08 63.33 67.89
Margin 1.6% 1.2% 1.0% 1.0% 1.0% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2%EBIT 170.17 184.44 215.45 252.36 294.35 275.99 299.33 324.64 352.09 381.84 414.11
Annual Growth 8.4% 16.8% 17.1% 16.6% -6.2% 8.5% 8.5% 8.5% 8.5% 8.4%
Margin 5.9% 6.2% 6.9% 7.2% 7.8% 6.8% 6.9% 7.0% 7.0% 7.1% 7.2%
Less: Income Taxes 49.00 48.30 60.57 72.12 68.49 85.28 92.49 100.31 108.79 117.99 127.96
Effective Tax Rate 36.1% 31.0% 31.0% 30.8% 25.8% 30.9% 30.9% 30.9% 30.9% 30.9% 30.9%
Unlevered Net Income 121.17 136.14 154.88 180.25 225.86 190.71 206.84 224.33 243.29 263.85 286.15
Plus: Depreciation 46.20 36.62 32.03 35.64 38.85 47.95 51.41 55.11 59.08 63.33 67.89
Less: Capital Expenditures -29.16 -27.40 -27.61 -44.48 -55.46 -45.10 -48.35 -51.83 -55.56 -59.56 -63.85
Margin -1.0% -0.9% -0.9% -1.3% -1.5% -1.1% -1.1% -1.1% -1.1% -1.1% -1.1%
Less: Increase in NWC 33.39 42.48 59.51 -70.58 -24.61 14.71 15.77 16.90 18.12 19.43 20.82
Margin 1.2% 1.4% 1.9% -2.0% -0.7% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4%
Free Cash to Equity 171.60 187.84 218.82 100.83 184.63 208.27 225.66 244.51 264.93 287.05 311.01
Annual Growth 9.5% 16.5% -53.9% 83.1% 12.8% 8.4% 8.4% 8.4% 8.3% 8.3%
189.1641266 186.1611281 183.2043614180.2931545 177.4268439
Assumptions Equity Value Calculation
WACC 10.1% PV of5-YearEstimates 916.25
RevenueGrowth 7.2% PV of Terminal Value 2234.44
Tax Rate 30.9% Enterprise Value 3150.69
TerminalEV/EBITDA 7.50x Less: Net Debt 41.30
Equity Value 3191.99
Margins Initial Growth
EBITDA 8.0% 1.0% Shares Outstanding 59.21
Depreciation 1.2% 0.0% Implied Value PerShare 53.91
CAPEX -1.1% 0.0% Premium to Market Price 26.8%
NWC 0.4% 0.0%Implied Perpetual FCF Growth 1.5%
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SynergiesGeographies and
Categories Idea sharing across markets
and geographies Capitalize on Reebok's skills
and know how to accelerateAdidas position in NorthAmerica
Benefit from Adidas expertise
in Europe and Reebok's inAsia
Combine expertise inbranded and licensedathletic apparel
Consumer &Demographics
Ability to identify sport/style trends
Better product and categoryprioritization
More products and more pricepoints
Continue brand developmentsinto new segments
Benefit from Reebok's expertise inWomen's segment
Capitalize from Reebok's skills insport lifestyle and leisure
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Synergies contd
Technology Enhance profile as
technology leader andinnovation leader
Bigger combined R&D spend
More products to capitalizeon R&D spending
New technologydevelopments andawareness across brands
Applications
Materials
Licenses, Events and Teams
Transfer of skills and know-
how
Management of exclusiveagreements
Relationship with teams and
athletes
More active eventscalendar
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Synergies contd
Distribution Channels
Capitalize on Adidas in-depth
understanding of specializedsporting goods channel
Benefit from Reebok's stronginsights into department storeand general merchandisechannel
Selective ChannelDiversification
Expand on retail initiativesin emerging markets
Operating Efficiencies Sales, Marketing & Distribution 40% of
Synergies
Higher efficiency through combinedsales and marketing scale
Better utilization of availabledistribution capacity
Admin Services & IT 40% of Synergies
Simplify overlapping functions
Remove Duplicative IT Functions
Operations and Sourcing 20% ofSynergies
Greater economies of scale inglobal sourcing
Improved warehousing facilities
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Combined Valuation w/oSynergies2005E 2006E 2007E 2008E 2009E 2010E
Total Revenues 12388.46 13097.16 13847.71 14642.69 15484.80 16376.94
Annual Growth 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
EBITDA 1191.14 1259.28 1331.45 1407.88 1488.85 1574.63
Annual Growth 5.7% 5.7% 5.7% 5.8% 5.8%
Margin 9.6% 9.6% 9.6% 9.6% 9.6% 9.6%
Less: Depreciation 63.55 67.18 71.03 75.11 79.43 84.01
Margin 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%
EBIT 1127.59 1192.10 1260.41 1332.77 1409.42 1490.62
Annual Growth 5.7% 5.7% 5.7% 5.8% 5.8%
Margin 9.1% 9.1% 9.1% 9.1% 9.1% 9.1%
Less: Income Taxes 398.04 420.81 444.93 470.47 497.52 526.19
Effective Tax Rate 35.3% 35.3% 35.3% 35.3% 35.3% 35.3%
Unlevered Net Income 729.55 771.29 815.49 862.30 911.89 964.43
Plus: Depreciation 63.55 67.18 71.03 75.11 79.43 84.01
Less: Capital Expenditures -129.55 -136.96 -144.81 -153.13 -161.93 -171.26
Margin -1.0% -1.0% -1.0% -1.0% -1.0% -1.0%
Less: Increase in NWC -11.21 -11.85 -12.53 -13.25 -14.01 -14.81
Margin -0.1% -0.1% -0.1% -0.1% -0.1% -0.1%
Free Cash to Equity 652.34 689.66 729.18 771.04 815.39 862.36Annual Growth 5.7% 5.7% 5.7% 5.8% 5.8%
5 94 .1 17 59 43 5 72 .0 44 37 88 5 50 .8 43 78 32 5 30 .4 79 84 66 5 10 .9 18 12 83
Assumptions Equity Value Calculation
WACC 9.8% PV of5-YearEstimates 2758.40
RevenueGrowth 5.0% PV of Terminal Value 7893.25
Tax Rate 35.3% Enterprise Value 10651.66
TerminalEV/EBITDA 8.00x Less: Net Debt -922.73
Equity Value 9728.93
Shares Outstanding 183.44
Implied Value PerShare 53.04
Premium to Market Price 16.9%
Implied Perpetual FCF Growth 3.0%
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Combined Valuation w/Synergies2005E 2006E 2007E 2008E 2009E 2010E
Total Revenues 12398.46 13147.16 13947.71 14892.69 15984.80 16876.94
Annual Growth 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
EBITDA 1192.10 1264.09 1353.56 1516.92 1686.92 1772.70
Annual Growth 6.0% 7.1% 12.1% 11.2% 5.1%
Margin 9.6% 9.6% 9.7% 10.2% 10.6% 10.5%
Less: Depreciation 63.55 67.39 71.49 76.33 81.93 86.50
Margin 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%
EBIT 1128.55 1196.70 1282.07 1440.59 1604.99 1686.20
Annual Growth 6.0% 7.1% 12.4% 11.4% 5.1%
Margin 9.1% 9.1% 9.2% 9.7% 10.0% 10.0%
Less: Income Taxes 398.38 422.44 452.57 508.53 566.56 595.23
Effective Tax Rate 35.3% 35.3% 35.3% 35.3% 35.3% 35.3%
Unlevered Net Income 730.17 774.27 829.50 932.06 1038.43 1090.97
Plus: Depreciation 63.55 67.39 71.49 76.33 81.93 86.50
Less: Capital Expenditures -129.55 -137.38 -145.74 -155.61 -167.03 -176.35
Margin -1.0% -1.0% -1.0% -1.0% -1.0% -1.0%
Less: Increase in NWC -11.21 -11.88 -12.61 -13.46 -14.45 -15.25
Margin -0.1% -0.1% -0.1% -0.1% -0.1% -0.1%
Free Cash to Equity 652.96 692.39 742.64 839.32 938.89 985.87Annual Growth 6.0% 7.3% 13.0% 11.9% 5.0%
5 94 .6 84 15 59 5 74 .3 12 23 66 5 61 .0 12 34 29 5 77 .4 52 60 79 5 88 .3 03 93 21
Assumptions Equity Value Calculation
WACC 9.8% PV of5-YearEstimates 2895.77
RevenueGrowth 5.0% PV of Terminal Value 8886.16
Tax Rate 35.3% Enterprise Value 11781.92
TerminalEV/EBITDA 8.00x Less: Net Debt -922.73
Equity Value 10859.19
Shares Outstanding 183.44
Implied Value PerShare 59.20
Premium to Market Price 16.9%
Implied Perpetual FCF Growth 2.8%
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Actual Acquisition Statistics
Adidas paid $3.527 billion for Reebok
Adidas paid $59.00 per share for all of Reeboksshares
Adidas paid a 34.2% premium which was stillaccretive to the P/E ratio
Based on our model Adidas could have paid
between $53.91 & $66.85
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Integration Issues
Management /Structure Changes
New Brand CEOs and Reebok CEO to Advisor
Head Quarters to Remain
Integration planning team comprised of employees from both
Employee Care and Retention
Mixed employee benefits
HR resources to all employees
Distribution Centers and Back Operations
Combined many Distribution Centers and Back Operations
Reebok switched from a Bulk Pre-Order system to Pay-as-You-go
Consolidate Suppliers
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Integration Issues
Research & Development
Combined to share both costs and technology
Reduced employees and raised efficiencies
Brand Imaging to Reebok as Premium Shoe
New Pay-as-You-go system reduces retailer sales on Reebok
Customize shoes through a website
Increase Prices
Reduce manufacturing of Classic Styles
Geographies and Product Lines
Increased international presence and product lines (i.e. shoes & apparel)
Licenses, Events and Teams
Very similar strategy for both brands but Adidas gets Reebok NBA contract
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Post-Integration Results
Management/Structure Changes
Successful through speed, efficiency and cooperation
Employee Care
Handled as well as could be expected
Distribution Centers
Mixed Emotions in short term, spent money to become efficient
Taking longer than anticipated
R&D
Successful at reaching companies goals on new products & efficiency
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Post-Integration Results
Brand Imaging
Continue to face uphill battle and challenge
Success is still possible in long term
Geographies and Product Lines
Expansion into new countries has partially offset loses in mature markets
New product lines and strategies have produced mixed results
Licenses, Events and Teams
With little change no success or failure has been noticed
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Did the merger work?
Our focus this year will be on getting Reebokback onto a growth track. It's going to take time,
but we're moving in the right direction.- Herbert Hainer, Adidas Chief Executive in 2007
Gross margins dropped 3.6% in 2007.
Sales and order back log of Reebok declined.
The whole group still made money.
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What went wrong?
Misperception among Retail Partners about thefuture of Reeboks brand strategy
Questions about the German AmericanCorporate Culture.
Underestimation of competition from Nike.
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Whats happening now?
In 2008, Adidas put in an extra $50 million to bringback Reebok on track.
Started realizing some of the synergies in late2008 but on a lower scale than estimated.
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Q&A