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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