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