adidas-Salomon to Acquire Reebok in $3.8 Billion Deal

August 3, 2005
SGB Executive
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The rumor wire heated up to a white hot level on Tuesday after being dormant for almost a year. The deal announced Wednesday morning goes beyond the sporting goods landscape in its scope and will have a much broader impact on the market. This may not come close to the level of the recently announced P&G/Gillette deal, but treat it in the same light as HP/Compaq, Wachovia/First Union, or a BofA/Fleet.

The Boards of adidas-Salomon AG and Reebok International Ltd. decided that adidas will acquire all of the outstanding shares of Reebok for $59.00 per share in cash.
The offer price represents a premium of 34.2% over the closing price of Reebok’s stock on August 2, 2005. The transaction value is approximately €3.1 billion ($3.8 billion) including the assumption of net cash of €69 million ($84 million). The transaction is subject to the approval of Reebok’s shareholders as well as to the regulatory approvals and customary closing conditions. Both companies believe that the transaction will close in the first half of 2006.

The deal is an obvious move by both companies to attempt something radical in an attempt to gain some level of parity with Nike, Inc. Once Nike’s put in place a more aggressive global multi-brand strategy that had at its core the ability stratify the retail market by brand instead by segmented product or category, the game had clearly changed. Nike’s ability to position Starter at the base of the pyramid servicing the mass retail market, while using Converse to service the middle of the pyramid, gave Nike cover to focus brand efforts at the top of the model. Only problem fro the competition is that they didn’t have multiple brads to play with, and they didn’t have the depth of technology to play at different levels of the distribution matrix.

adidas will now have the ability to create a similar model, by using Reebok’s Logo Athletic brand in the mass channel, while Reebok can be used in the middle of the pyramid where it plays best. adidas can be positioned at the top of the model, further building brand cache. The other similarities are quite interesting as well. Nike and adidas each now have a golf division and both have a hockey division.

The deal, which would create a company with nearly 20% of the U.S. athletic-shoe market, is pending the approval of Reebok shareholders and anti-trust authorities.
In the fiscal year ended Friday, Nike had $13.7 billion in revenue. Revenue for Reebok in 2004 was $3.8 billion, while Adidas' revenue was €6.5 billion, currently about $7.9 billion.

“With Reebok, we are advancing our position on the playing field of the sporting goods industry and are improving our financial strength to drive increased shareholder value,” said Hainer in one AP report.

In the same report, Reebok chairman and CEO Paul Fireman said the deal would “put the company on track to take on Nike directly, among others.”

“With Adidas, we are able to offer an enhanced portfolio of global brands that truly addresses the needs of today's and tomorrow's consumers,” he said in the article.
Reebok will continue to operate under its own name and its headquarters will remain in Canton, Mass. Adidas said it did not expect any significant reductions in the work forces of both companies after the acquisition.
Merrill Lynch advised adidas-Salomon, and Credit Suisse advised Reebok.


>>> This will be an interesting one to watch. We’re not sure you can find two completely different cultures. Reebok is fairly loose and operates with perfection on the quarterly financial reporting cycle, a cycle that does not support the development and execution of long-term strategies. Everything rests solidly on the back of one guy, Paul Fireman. adidas, on the other hand, is seen as structured and disciplined and in some ways too rigid in its approach. Herbert Hainer relies very heavily on his team to develop and execute the long-term strategies for the brand. A strong number two guy already residing in the U.S. gives them solid leadership on the ground here. It will be interesting to see how these two blend over the next few years…


>>> Like all mergers, you do not need the duplication of functions that are glaringly obvious in this deal…


>>> How the brands come to market will now clearly be driven out of Germany…

adidas-Salomon to Acquire Reebok in $3.8 Billion Deal

SGB Executive SGB Update
by

adidas-Salomon AG and Reebok International Ltd. have announced that their Boards of Directors have unanimously approved a definitive agreement under which adidas-Salomon AG would acquire all of the outstanding shares of Reebok for U.S. $59.00 per share in cash. The offer price represents a premium of 34.2% over the closing price of Reebok’s stock on August 2, 2005. The transaction value is approximately €3.1 billion (U.S. $3.8 billion) including the assumption of net cash of €69 million (U.S. $84 million).

The combination of adidas and Reebok accelerates the adidas Group’s strategic intent in the global athletic footwear, apparel and hardware markets. The new Group will benefit from a more competitive platform worldwide, well-defined and complementary brand identities, a wider range of products, and an even stronger presence across teams, athletes, events and leagues. The new adidas Group has pro forma aggregate 2004 revenues of €8.9 billion (U.S. $11.1 billion).

“Today’s announcement represents a major strategic milestone for our Group,” said adidas-Salomon Chairman and CEO Herbert Hainer. “This is a once-in-a-lifetime opportunity to combine two of the most respected and well-known companies in the worldwide sporting goods industry. adidas-Salomon and Reebok are energetic and growing companies with a shared commitment to innovation, sport performance and sport lifestyle. Together, we will expand our geographic reach, particularly in North America, and create a footwear, apparel and hardware offering that addresses a broader spectrum of consumers and demographics. With Reebok, we are advancing our position on the playing field of the sporting goods industry and are improving our financial strength to drive increased shareholder value.”

“We have long respected Paul Fireman and his team for what they have accomplished at Reebok, and we expect them to be an important part of our Group as we bring these two world class organizations together,” Herbert Hainer continued. “We are pleased to welcome them to the adidas family. Their experiences and insights will play a central role in the continued development of the new Group both in North America and internationally.”

“adidas is the perfect partner for Reebok,” said Paul Fireman, Reebok Chairman and CEO. “With adidas, we are able to offer an enhanced portfolio of global brands that truly addresses the needs of today’s and tomorrow’s consumers. As an aspirational global sports performance and lifestyle brand, Reebok’s mission is to enroll global youth through sports, music and technology. This complements adidas’s mission to be the leading sports brand in the world with a focus on performance and international presence. This transaction provides our shareholders with good value for their shares and our employees with an opportunity for an even more exciting future. I am thrilled by the opportunity to work with Herbert Hainer and the adidas team in our endeavour to take both brands to the next level.”

Strategic and Financial Benefits of the Transaction

adidas believes that the complementary nature of the two businesses in various geographies, products and consumer segments provides a significant opportunity for increased value creation. The combination will enable the Group to generate substantial cost savings as well as incremental revenue and profits from more complete coverage of all consumer segments. Given the solid management teams at both companies, adidas expects to realize the benefits of this transaction quickly and efficiently following the transaction’s close.

Strategic

• Extended geographic reach and more balanced sales profile. Reebok complements adidas’s international profile and enhances adidas’s strong position in North America. North America represents approximately 50% of the global sporting goods market, and with Reebok, the adidas Group’s North American sales will more than double to €3.1 billion (U.S. $3.9 billion). In Europe and Asia, adidas enjoys stronger brand recognition, and has significant marketing expertise and insights. adidas expects to use this expertise to further develop Reebok’s global presence.

• World-class and talented employees. Both adidas-Salomon and Reebok bring an exceptional team of talented and experienced employees to the new group. As a result of this transaction, Group employees will have even more exciting job opportunities.

• Broader portfolio of world-renowned brands. The combined entity will have a more complete portfolio of brands that caters to a global consumer base. The portfolio will be anchored by two brands with well-defined identities – adidas, a leader in sports performance with a European heritage, and Reebok, an American leader in sports and lifestyle products. With its broad portfolio of brands, including adidas, Reebok, TaylorMade, Rockport, Greg Norman Collection, MAXFLI, CCM, Jofa and Koho, the adidas Group will be able to offer footwear, apparel and hardware products based on cutting-edge technology, trend-setting street wear and classic design.

• A more complete product offering in key sports categories. The new adidas Group will have a stronger presence in American sports and a complete product offering that addresses key sports categories, including soccer, basketball, running, American football, hockey, tennis, training, outdoor and golf.

• Stronger presence across teams, athletes, events and leagues. adidas expects that the combined Group’s strong presence across teams, athletes, events and leagues will enable it to substantially increase the worldwide visibility of its brands. The Group’s endorsement contracts will include many of the world’s elite teams, such as Real Madrid, Milan AC, Bayern Munich and Liverpool FC, and athletes, such as David Beckham, Tracy McGrady, Yao Ming and Allen Iverson, as well as high-profile global events, such as the 2006 FIFA World CupTM and the Beijing 2008 Olympics. The Group will also have licensing relationships with the UEFA Champions LeagueTM, more than twenty National Olympic Committees and five premier sporting leagues – the NFL, NBA, NHL, MLB and MLS.

• Enhanced R&D capabilities and cutting-edge technology. adidas is an award winning technology leader in the industry with the adidas innovation team having developed cutting-edge technologies, such as adidas_1, the first “intelligent running shoe,” ClimaCool TM and a3®. Reebok also has a very talented group of experienced research and development professionals who have developed a distinguished portfolio of breakthrough product innovations, including the Pump 2.0 and DMX.
By harnessing both companies’ R&D expertise, the new adidas Group expects to accelerate new product introductions in footwear, apparel and hardware to help drive increased brand awareness and consumer demand across all brands.

Financial

• Accretive to earnings. adidas expects the transaction to be accretive to the Group’s earnings per share in the first full year after closing.

• Return in excess of cost of capital. The transaction is expected to generate a return in excess of cost of capital in the third full year after closing.

• Strong operating cash flow. With aggregate 2004 pro forma cash flow of approximately
€671 million (U.S. $835 million), adidas expects the combined Group’s financial strength to enable it to reduce debt and continue funding the Group’s established growth initiatives.

• Substantial operational synergies. adidas expects to achieve approximately €125 million
(U.S. $150 million) of annual cost savings by the third year after closing. In addition, the Group expects incremental revenue and profits from more complete coverage of all consumer segments.

Financing and Capital Structure

adidas-Salomon AG intends to finance the acquisition through a combination of debt and equity, with the objective of maintaining a strong investment grade profile.

Management and Headquarters

The structure of the combined Group has been agreed to secure a rapid delivery of the strategic and financial benefits created by the transaction. adidas will maintain its corporate headquarters in Herzogenaurach and its North American adidas headquarters in Portland, Oregon. Mr. Fireman will remain as Chief Executive Officer of Reebok International Ltd. and will continue to lead the Reebok team. Reebok will continue to operate under its name and will retain its headquarters in Canton, Massachusetts. This transaction is about growing the combined entity, and adidas-Salomon does not anticipate significant workforce reductions.

Approvals and Timing

The transaction is subject to customary closing conditions and regulatory approvals as well as approval by Reebok shareholders. Paul and Phyllis Fireman collectively own approximately 17% of Reebok’s outstanding shares and have agreed to vote their shares in favor of the transaction. The companies believe that the transaction will close in the first half of 2006.

Advisors

In connection with the transaction, Merrill Lynch is acting as financial advisor to adidas-Salomon AG, and an international legal team led by Simpson Thacher & Bartlett LLP assisted by Beiten Burkhardt, Eversheds LLP and Wilmer Cutler Pickering Hale and Dorr LLP is serving as legal counsel. Credit Suisse First Boston LLC is acting as financial advisor to Reebok, and Ropes & Gray LLP and Latham & Watkins LLP are serving as legal counsel.

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