Moody’s Investors Service said that Authentic Brands’ proposed debt-financed acquisition of Reebok has no immediate impact on its credit ratings.

On August 12, 2021, both Authentic Brands(B2 Stable) and Adidas AG (A2 Stable) announced that Authentic Brands entered into a definitive agreement to purchase Reebok from Adidas AG for a total consideration of up to € 2.1 billion, with the majority to be paid in cash at closing and the remainder comprised of deferred and contingent consideration. The transaction is expected to close in the first quarter of 2022, subject to customary closing conditions including regulatory approval.

Moody’s said Authentic Brands’ B2 corporate family rating and stable outlook are not currently impacted despite the expected significant increase in debt to fund the acquisition and heightened integration and execution risks, particularly since Reebok’s sales growth has consistently lagged behind that of Adidas and the brand’s turnaround, launched in 2016, is still ongoing. Moody’s said Authentic Brands has exhibited steady operating performance over the past few years, including demonstrated resilience through the coronavirus pandemic, and the company has developed a strong track record of acquiring, integrating and growing brands.

Moody’s said, “Authentic Brands’ financial leverage has declined significantly over the past 12 months due to continued revenue and EBITDA growth, and it continues to generate strong free cash flow. For the latest twelve-month period ended March 2021, Moody’s lease-adjusted debt-to-EBITDA declined below five times and EBITA/Interest coverage improved to over 4 times; levels that are better than Moody’s upward rating indicators. These numbers exclude earnings for the acquisitions of Eddie Bauer, which closed on June 1, and Heritage Brands, which closed on August 2. Prior to the proposed acquisition of Reebok, Moody’s expected continued improvement over the next twelve months due to continued organic growth and additional earnings related to the recent acquisitions. Per Moody’s estimations, pro forma leverage could increase well over 6.5 times upon closing of the acquisition to the extent it is fully debt financed. However, its core earnings growth and strong free cash flow support subsequent credit metric improvement.

“While Authentic Brands disclosed that it has received financing commitments, the amount of debt to be raised for the transaction has not yet been publicly disclosed, and the ultimate size of the transaction, timing of deferred and contingent consideration, and impact on Authentic Brands’ revenue, earnings and credit metrics remains uncertain. In addition, the amount, timing, and use of proceeds from a potential initial public offering (“IPO”) also remain uncertain. Moody’s will continue to monitor these developments.”

Photo courtesy Reebok