reebokpresentation final 100324143012 phpapp02

8/3/2019 Reebokpresentation Final 100324143012 Phpapp02

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Adidas/Reebok MergerOctober 8, 2009 Collin Shaw

Kelly TruesdaleMichael Rockette

Benedikte Schmidt

SaravananSadaiyappan


2/27

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?


3/27

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.


7/27

US Footwear Market


8/27

Expected Trend

Expected growth rate ~9%

Change from Supply Push to Demand Pullmodel.

Blurring line between sport wear and activewear.

Demand for athleisure shoes.


9/27

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


10/27

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


11/27

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


12/27

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


15/27

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


16/27

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





TerminalEV/EBITDA 8.00x Less: Net Debt -922.73


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





TerminalEV/EBITDA 8.00x Less: Net Debt -922.73


Shares Outstanding 183.44

Implied Value PerShare 59.20

Premium to Market Price 16.9%

Implied Perpetual FCF Growth 2.8%


19/27

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


20/27

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


21/27

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)


Very similar strategy for both brands but Adidas gets Reebok NBA contract


22/27

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


23/27

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


With little change no success or failure has been noticed


24/27

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.


26/27

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

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