Adidas/Reebok MergerOctober 8, 2009 Collin Shaw
Kelly TruesdaleMichael Rockette
Benedikte SchmidtSaravananSadaiyappan
Key TakeawaysWhat value does Reebok add to Adidas?
How should Adidas value Reebok and with what synergies?
Has the merger been a success or failure?
Agenda
Adidas & Reebok Background
Acquisition Background
Industry Overview
SWOT Analysis
Valuation Model
Synergies
Integration Plan
Post Integration
Conclusions
AdidasFounded 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
ReebokFounded 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
Industry OverviewOne of the most competitive industries.
Over 75% of the industry controlled by branded items.
Large players – supplier power and access to shelf space.
Small players – anticipating a fashion trend.
Private label a threat.
US Footwear Market
Expected TrendExpected growth rate ~9%
Change from “Supply Push” to “Demand Pull” model.
Blurring line between sport wear and active wear. Demand for “athleisure” shoes.
Acquisition BackgroundGoal: increase share in the U.S. market +
better compete 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
SWOT AnalysisStrengths
Adidas is strong in Europe, Reebok is strong in US, & Asia
Complementary licenses and contracts
Reduced costs for retailers
Reebok is extremely strong in Women’s wear
Weaknesses Many overlapping products
Two HQ’s that will be hard to integrate
Two very strong, distinct corporate cultures
SWOT AnalysisOpportunities
Leverage combined R&D strengths & budgets
Bring Reebok’s women’s wear to Europe
Reduce costs to retailers by larger distribution networks
Ability for better reaction to global trends
Threats Competition between
brands employees
Cannibalization of sales
Realization of revenue growth synergies
Adidas may treat Reebok as a second tier brand
Valuation Model AssumptionsReebok 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%
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 5744.70Annual Growth 4.5% 4.5% 11.4% 8.6% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2%
EBITDA 216.37 221.06 247.48 288.00 333.19 323.94 350.74 379.75 411.16 445.17 482.00Annual 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 67.89Margin 1.6% 1.2% 1.0% 1.0% 1.0% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2%
EBIT 170.17 184.44 215.45 252.36 294.35 275.99 299.33 324.64 352.09 381.84 414.11Annual 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 92.49 100.31 108.79 117.99 127.96Effective 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 121.17 136.14 154.88 180.25 225.86 190.71 206.84 224.33 243.29 263.85 286.15Plus: Depreciation 46.20 36.62 32.03 35.64 38.85 47.95 51.41 55.11 59.08 63.33 67.89Less: 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 183.2043614 180.2931545 177.4268439Assumptions Equity Value Calculation
WACC 10.1% PV of 5-Year Estimates 916.25Revenue Growth 7.2% PV of Terminal Value 2234.44Tax Rate 30.9% Enterprise Value 3150.69Terminal EV/EBITDA 7.50x Less: Net Debt 41.30 Equity Value 3191.99Margins Initial Growth EBITDA 8.0% 1.0% Shares Outstanding 59.21Depreciation 1.2% 0.0% Implied Value Per Share 53.91CAPEX -1.1% 0.0% Premium to Market Price 26.8%NWC 0.4% 0.0%
Implied Perpetual FCF Growth 1.5%
SynergiesGeographies and
Categories Idea sharing across markets
and geographies
Capitalize on Reebok's skills and know how to accelerate Adidas position in North America
Benefit from Adidas expertise in Europe and Reebok's in Asia
Combine expertise in branded and licensed athletic apparel
Consumer & Demographics
Ability to identify sport/style trends Better product and category
prioritization More products and more price
points
Continue brand developments into new segments
Benefit from Reebok's expertise in Women's segment
Capitalize from Reebok's skills in sport lifestyle and leisure
Synergies – cont’d
Technology Enhance profile as technology
leader and innovation leader
Bigger combined R&D spend
More products to capitalize on R&D spending
New technology developments and awareness across brands Applications Materials
Licenses, Events and Teams
Transfer of skills and know-how
Management of exclusive agreements
Relationship with teams and athletes
More active events calendar
Synergies – cont’d
Distribution Channels Capitalize on Adidas in-depth
understanding of specialized sporting goods channel
Benefit from Reebok's strong insights into department store and general merchandise channel
Selective Channel Diversification Expand on retail initiatives
in emerging markets
Operating Efficiencies Sales, Marketing & Distribution 40% of
Synergies Higher efficiency through combined
sales and marketing scale Better utilization of available
distribution capacity
Admin Services & IT 40% of Synergies Simplify overlapping functions Remove Duplicative IT Functions
Operations and Sourcing 20% of Synergies Greater economies of scale in
global sourcing Improved warehousing facilities
Combined Valuation w/o Synergies
2005E 2006E 2007E 2008E 2009E 2010ETotal 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 84.01Margin 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%
EBIT 1127.59 1192.10 1260.41 1332.77 1409.42 1490.62Annual 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 398.04 420.81 444.93 470.47 497.52 526.19Effective Tax Rate 35.3% 35.3% 35.3% 35.3% 35.3% 35.3%
Unlevered Net Income 729.55 771.29 815.49 862.30 911.89 964.43Plus: Depreciation 63.55 67.18 71.03 75.11 79.43 84.01Less: 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 652.34 689.66 729.18 771.04 815.39 862.36
Annual Growth 5.7% 5.7% 5.7% 5.8% 5.8%594.1175943 572.0443788 550.8437832 530.4798466 510.9181283
Assumptions Equity Value Calculation WACC 9.8% PV of 5-Year Estimates 2758.40Revenue Growth 5.0% PV of Terminal Value 7893.25Tax Rate 35.3% Enterprise Value 10651.66Terminal EV/EBITDA 8.00x Less: Net Debt -922.73 Equity Value 9728.93 Shares Outstanding 183.44 Implied Value Per Share 53.04 Premium to Market Price 16.9%
Implied Perpetual FCF Growth 3.0%
Combined Valuation w/ Synergies
2005E 2006E 2007E 2008E 2009E 2010ETotal 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 86.50Margin 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%
EBIT 1128.55 1196.70 1282.07 1440.59 1604.99 1686.20Annual 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 398.38 422.44 452.57 508.53 566.56 595.23Effective 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 1090.97Plus: Depreciation 63.55 67.39 71.49 76.33 81.93 86.50Less: 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 652.96 692.39 742.64 839.32 938.89 985.87
Annual Growth 6.0% 7.3% 13.0% 11.9% 5.0%594.6841559 574.3122366 561.0123429 577.4526079 588.3039321
Assumptions Equity Value Calculation WACC 9.8% PV of 5-Year Estimates 2895.77Revenue Growth 5.0% PV of Terminal Value 8886.16Tax Rate 35.3% Enterprise Value 11781.92Terminal EV/EBITDA 8.00x Less: Net Debt -922.73 Equity Value 10859.19 Shares Outstanding 183.44 Implied Value Per Share 59.20 Premium to Market Price 16.9%
Implied Perpetual FCF Growth 2.8%
Actual Acquisition StatisticsAdidas paid $3.527 billion for Reebok
Adidas paid $59.00 per share for all of Reebok’s shares Adidas paid a 34.2% premium which was still
accretive to the P/E ratio
Based on our model Adidas could have paid between $53.91 & $66.85
Integration Issues Management /Structure Changes
New Brand CEO’s 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
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
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
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
Did the merger work?“Our focus this year will be on getting Reebok
back 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.
What went wrong?Misperception among Retail Partners about the
future of Reebok’s brand strategy
Questions about the German – American Corporate Culture.
Underestimation of competition from Nike.
What’s happening now? In 2008, Adidas put in an extra $50 million to
bring back Reebok on track.
Started realizing some of the synergies in late 2008 but on a lower scale than estimated.
Q&A