Adidas/Reebok Merger

October 8, 2009 Collin Shaw

Kelly Truesdale
Michael Rockette
Benedikte Schmidt
SaravananSadaiyappan
Key Takeaways
 What 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
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

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

Industry Overview
 One 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 Trend
 Expected growth rate ~9%

 Change from “Supply Push” to “Demand Pull”

model.

 Blurring line between sport wear and active

wear.
 Demand for “athleisure” shoes.
Acquisition Background
 Goal: 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 Analysis
Strengths Weaknesses
 Adidas is strong in Europe,  Many overlapping products
Reebok is strong in US, &
Asia  Two HQ’s that will be hard
to integrate
 Complementary licenses
and contracts  Two very strong, distinct
corporate cultures
 Reduced costs for retailers

 Reebok is extremely strong

in Women’s wear
SWOT Analysis
Opportunities Threats
 Leverage combined R&D  Competition between
strengths & budgets brands employees

 Bring Reebok’s women’s  Cannibalization of sales

wear to Europe
 Realization of revenue
 Reduce costs to retailers by growth synergies
larger distribution networks
 Adidas may treat Reebok as
 Ability for better reaction to a second tier brand
global trends
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%
 Valuation Model
2000 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 183.2043614 180.2931545 177.4268439

Assumptions Equity Value Calculation
WACC 10.1% PV of 5-Year Estimates 916.25
Revenue Growth 7.2% PV of Terminal Value 2234.44
Tax Rate 30.9% Enterprise Value 3150.69
Terminal EV/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 Per Share 53.91
CAPEX -1.1% 0.0% Premium to Market Price 26.8%
NWC 0.4% 0.0%
Implied Perpetual FCF Growth 1.5%
Synergies
Geographies and Consumer &
Categories Demographics
 Idea sharing across markets  Ability to identify sport/style trends
and geographies  Better product and category
prioritization
 Capitalize on Reebok's skills
and know how to accelerate  More products and more price
Adidas position in North points
America
 Continue brand developments
 Benefit from Adidas expertise into new segments
in Europe and Reebok's in
Asia  Benefit from Reebok's expertise in
Women's segment
 Combine expertise in
branded and licensed  Capitalize from Reebok's skills in
athletic apparel sport lifestyle and leisure
Synergies – cont’d
Technology Licenses, Events and Teams
 Enhance profile as  Transfer of skills and know-
technology leader and
innovation leader how

 Bigger combined R&D spend  Management of exclusive

agreements
 More products to capitalize
on R&D spending
 Relationship with teams and
 New technology athletes
developments and
awareness across brands  More active events
 Applications calendar
 Materials
Synergies – cont’d
Distribution Channels Operating Efficiencies
 Capitalize on Adidas in-depth  Sales, Marketing & Distribution 40% of
Synergies
understanding of specialized  Higher efficiency through combined
sporting goods channel sales and marketing scale
 Better utilization of available
 Benefit from Reebok's strong distribution capacity
insights into department store  Admin Services & IT 40% of Synergies
and general merchandise  Simplify overlapping functions
channel
 Remove Duplicative IT Functions

 Selective Channel  Operations and Sourcing 20% of

Diversification Synergies
 Greater economies of scale in
 Expand on retail initiatives global sourcing
in emerging markets  Improved warehousing facilities
Combined Valuation w/o
Synergies
2005E 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 652.34 689.66 729.18 771.04 815.39 862.36
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 2758.40
Revenue Growth 5.0% PV of Terminal Value 7893.25
Tax Rate 35.3% Enterprise Value 10651.66
Terminal 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 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 652.96 692.39 742.64 839.32 938.89 985.87
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 2895.77
Revenue Growth 5.0% PV of Terminal Value 8886.16
Tax Rate 35.3% Enterprise Value 11781.92
Terminal 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 Statistics
 Adidas 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