“What’s Anta Sports?” was among the questions heard by more than a few market observers after news arrived Tuesday that the Chinese sports powerhouse had made an all-cash offer to acquire Amer Sports, the owner of Salomon, Arc’teryx, Suunto, Wilson, Louisville Slugger, Precor and a few other niche sports brands.

As reported, Anta partnered with FountainVest Partners, a Hong Kong private equity group, to offer €40 per share for Amer, representing a nearly 40 percent premium to Monday’s closing price before the approach was made public. The offer values Amer at more than €4.6 billion ($5.3 bn).

Amer said the non-binding and preliminary offer was dependent on a numerous conditions including financing, board approval as well as approval from at least 90 percent of shareholders.

“At this time, Amer Sports is not engaged in any negotiations with the Consortium and has made no decisions in respect of the Indication of Interest,” Amer said in a statement. “Amer Sports will release further information at an appropriate time if an agreement is reached with the Consortium in respect of a transaction or any negotiations are terminated or abandoned.”

Anta hasn’t publicly commented on the bid but over the last year has made the company’s ambitions to become a global superpower in sporting goods well known. Amer also held the company’s annual Capital Markets Day last week to give a solid view of what Anta would be getting.

What is Anta Sports?

Founded as a factory in 1991, Anta has grown to become China’s largest domestic sportswear brand and is believed to be the third-largest in the world by market capitalization after Nike and Adidas.

In the company’s year ended December 31, sales grew 25.1 to RMB16.69 billion (U.S. $2.43 bn). Profits expanded 29.4 percent to RMB3.09 billion ($450 mm). Sales grew 20 percent in 2016 and 25 percent in 2015. In the six months ended June 30, sales ran up 44.1 percent and profits grew 34.0 percent.

The reason observers aren’t too familiar with Anta is the company generates nearly all business in China.

The company’s primary brand is Anta, which focuses on functional footwear and apparel products for running, crossing-training, basketball and soccer. The brand caters specifically to lower- and middle-income groups, and part of the brand’s success has been traced to opening stores in second and third tier cities. As at June 30, the total number of Anta stores (including Anta Kids stand-alone stores) in China stood at 9,650.

The Anta brand in recent years is also said to be benefitting from efforts to upgrade quality and invest in innovation to rely less on price as a differentiator.

Anta’s biggest marketing deal is the company’s partnership with the Chinese Olympic Committee (COC) and the company’s positioning as the official sportswear for the Chinese Sports Delegation.

Anta surpassed Li Ning as China’s largest domestic sportswear supplier in 2012 and in 2015 set a goal to become the second-largest sports brand in China by 2020. At the time, Nike was seen leading the market with a share of 18 percent, followed by Adidas, at around 16 percent. Anta was at 13 percent and the company’s largest local competitor was Li Ning, 8 percent.

An apparent big step toward that goal was the signing in June 2017 of Klay Thompson of the Golden State Warriors to a 10-year shoe deal. Anta also has a deal the New Orleans Pelicans’ Rajon Rondo and had deals with Kevin Garnett and Luis Scola in the past, but major pushes have been put behind Thompson’s three signature shoes.

But the Anta brand remains largely a China-only brand. Anta’s American website, for instance, indicates Thompson’s signature shoes are only available at Shoe Palace, the sneaker chain with stores across California. Anta officials told Bloomberg that the Anta brand planned to enter the European market in 2019.

In recent years, however, Anta has benefited from a “Single-Focus, Multi-Brand and Omni-Channel” program to accelerate growth in its home market. The “Multi-Brand” approach focuses on broadening its customer base with different brands to meet different client demands and has led to a number of licensing deals and outright acquisitions.

Anta’s first success with a second brand was with Fila. In 2009, Anta acquired the rights to use Fila brand in China and has earned praise for successfully turning around the money-losing business. Helped by campaigns featuring famous Chinese celebrity Gao Yuanyuan, Fila in China focuses on high-end and stylish sportswear. As of June 30, the total number of Fila doors (including Fila Kids and Fila Fusion stand-alone stores) in Mainland China, Hong Kong, Macao and Singapore reached 1,248.

Partnerships and acquisitions have picked up in the last two years with the multi-brand push. In the first half of 2016, Anta formed a joint venture with Descente Japan and Itochu for the rights to distribute Descente, best known for the company’s ski wear, in China. At June 30, the total number of Descente stores in China reached 85.

Also in 2016, Anta acquired an English brand, Sprandi, which mainly offers leisure footwear products.

In early 2017, Anta formed a joint venture to expand Kolon Sport, a leading outdoor brand in Korea, in China. As of June 30, the total number of Kolon Sport stores in China reached 189. In September 2017, Anta acquired Kingkow, a children’s wear brand based in Hong Kong, As of June 30, Kingkow had 63 stores in Mainland China, Hong Kong, Macao and the U.S.

In releasing the company’s annual figures in February 2018, Ding Shizhong, Anta’s chairman and CEO, noted that the company was seeking to improve product differentiation and increase market share in running, boxing, basketball, female fitness, cross-training and skiing sports segments. He also said the company would seek to acquire “high-end international sportswear brands” with strong growth potential in part to “fill the gaps between different market segments” while heralding new globalization goals.

“Last year marked the 10th anniversary since we were listed in Hong Kong in 2007 and was a year of strategic transformation for Anta from a traditional private company into an internationally competitive listed corporation with modern governance standards,” said Shizhong. “Our ‘Single-Focus, Multi-Brand, and Omni-Channel’ strategy has laid a solid and sound foundation. However, we are not satisfied with only being a leading multi-brand company in China. Through our multi-brand strategy, we aspire to become a competitive, global, multi-brand company with newly added brands including Kingkow And Kolon Sports. To that end, we are launching our globalization strategy in 2018. Through product innovation and R&D investment, we hope athletes will fight for glory in our sportswear and that the public will break through their limits with our products. We will tap into the global market with our best brands.”

What Attracted Anta to Amer Sports 

Acquiring Amer, which had sales of €2.69 billion ($3.12 bn) in 2017, would quickly support those global ambitions. Last year, 43 percent of Amer’s sales were in the EMEA region, the same 43 percent in the Americas and 14 percent in Asia Pacific.

Softgoods, led by Salomon and Arc’Teryx, is Amer’s fastest-growing segment and complements Anta’s footwear and apparel expertise while adding two premier outdoor brands to Anta’s mix. Amer in June acquired Swedish sports fashion brand Peak Performance as well.

The merger would also enable Anta to diversify into a number of other categories, including Ball Sports (Wilson, DeMarini, Louisville Slugger), Winter Sports (Atomic, Armada Skis), Sports Instruments (Suunto) and Cycling (Mavic, ENVE Composites). Anta could also decide sell-off some categories that don’t fit with the company’s soft-goods focus, including a few Amer said have been underperforming, but also may want to enter equipment categories to tap the burgeoning sports opportunity in China.

Indeed, the biggest benefit for Amer’s brand may be Anta’s proximity to accelerate Amer’s recent success expanding in China.

At the company’s Capital Markets Day presentation last Thursday, Heikki Takala, Amer’s president and CEO, noted that three areas–softgoods, DTC and China–have contributed “disproportionately” to Amer’s growth in recent years as they had been prioritized as “”transformational drivers” of growth for Amer.

Sales in China for Amer across brands have grown from less than 1 percent of sales in 2010 to 6 percent in 2018 with a near-term goal to reach 10 percent of sales. Over the last five years, Amer’s sales in China have grown at a 29 percent CAGR.

Amer’s focus on China, as well as Anta’s global growth ambitions, comes as the nation has put a high priority behind expanding sports. In 2014, China’s President Xi Jinping set out a plan to create a sport industry worth $850 billion by 2025, in part to support the goal of eventually becoming a superpower in global football and landing a World Cup. A national fitness plan was also launched to combat rising rates of health problems such as obesity and diabetes. Beyond a booming middle class, China also has 415 million millennials who have embraced active lifestyles, gym workouts and the athleisure trend and have also shown an appetite for foreign brands.

Beijing will also play host to the Winter Olympics in 2022, providing a springboard for sales of skis and snowboards, while the 2020 Summer Games is being held in Tokyo.

Anta would also look to build on some of the successes at Amer since 2010 when Amer’s current management and strategy started.

At Amer’s investor meeting, Takala noted that shares of Amer have grown 311 percent since 2010 and 79 percent since 2015, outperforming the broader market. Amer didn’t change the company’s outlook for the year as part of the meeting, but provided an update on business and slight adjustments to growth strategies.

Addressing the company’s seven business units, Takala said Apparel’s role for Amer remains “full acceleration” with the category delivering consistent double-digit growth and “executing fully” on the company’s plans.

Footwear, the second category, is being positioned for “sustainable, profitable growth” and is performing in line with internal expectations. Some inventories that needed to be cleaned up in 2018 had an adverse impact on top-line growth in footwear but “was the right thing to do vis-a-vis a sustainable long-term business model,” said Takala.

Third, Winter Sports’ role for Amer is seen as “sustainable profitability in all weather conditions,” given volatile winter weather patterns. Takala said the Winter Sports category has been performing “fully in line” with plans and has seen significant gross margin improvement due to past investments in operating efficiencies. Gross margins overall in the Winter Sports’ segment have improved 800 basis points versus 10 years ago.

In the fourth category, Ball Sports is seen as having a “cash and profit first” positioning for Amer. Takala said Ball Sports is “not fast growing, if growing at all” and requires a focus on profits. Added Takala, “It doesn’t mean that we don’t want to grow. We do want to grow in areas where it’s available. But we go for cash and profit first.”

Gross margins for Ball Sports have improved by over 300 basis points to over 40 percent over the past five years due to complexity reductions and acquisitions that have furthered scale.

Takala said the Ball Sports segment has been “largely in line” with targets for cash and profits over the last ten years. Growth is slightly underperforming with Amer still looking to “get to at least inflation level growth in that business.”

Takala said Apparel, Footwear, Winter Sports and Ball Sports are the largest businesses for Amer and are all supported by segment-leading brands and offer synergies across the organization.

Fitness, Sports Instruments, Cycling Below Plan for Amer 

In the fifth category, Fitness is positioned for “sustainable, profitable growth.” Significant investments were made in the segment in 2015 and 2016 with a focus on “fast-growing” areas Fitness wasn’t participating in, and that’s helping revive growth. But Takala said the top-line acceleration “took a little more time than expected.” The focus in the near-term will be to continue to build on the momentum in top-line growth and “then attack the profitability.”

Similarly, in Sports Instruments, the sixth category, major investments were made in 2015 and 2016 to address opportunities in wearables with the digitization trend and Sports Instruments has recently become the “fastest growing part of the company today.” Takala added, “As that growth is coming, we’ll seek to improve the profitability back to the target following the significant upfront investment.”

Takala, nonetheless, said both Fitness and Sports Instruments segments will be reviewed after the current strategy cycle is completed. Although seeing positive top-line momentum, both are not performing in line with expectations. Fitness is also more digital-and-technology driven and a “bit less synergistic” than the rest of Amer’s portfolio. Amer will pursue current strategies for both businesses to see how they perform and “confirm that these businesses can contribute to the company at the target level and then based on that, we’ll make the next choices.”

The final category, Cycling, is underperforming expectations in both growth and profitability. Takala said Amer has decided that the company’s “capabilities and capacities” aren’t a good match for cycling.

Structurally, Takala said Amer hasn’t been able “give enough scale and synergy potential and benefits” to the cycling business. He also said the category offers “a bit too much factory footprint and things like that which are fixed assets while the market continues to move somewhere else.”

Takala added, “We’ve done good things, but it’s clearly taking a lot of time and effort, and it’s not responding in line with expectations.”

As a result, the Cycling segment is being put under strategic review “to make sure we understand are we the best owner for the business.” The investment bank Centerview has been hired to assist in the process.

The Cycling segment, which includes Mavic and Enve, currently represents approximately 3.5 percent of Amer’s sales.

Beyond China, Amer officials also expected strong continued growth from softgoods, which has expanded from 20 percent of sales in 2010 to 40 percent in 2018 with a near-term goal of reaching 50 percent.

Overall, sales in softgoods have grown 11 percent on a CAGR over the last five years through June 2018, ahead of targeted growth of 9 to 10 percent. Growth in the softgoods area is expected to accelerate with the addition of Peak Performance. Softgoods has also been able to expand its gross margin rate by over 300 basis points over the last five years to more than 50 percent.

D2C sales have grown from 2 percent of Amer’s sales in 2010 to 10 percent in 2018 with a near-term goal of reaching 20 percent. D2C growth has seen a 22 CAGR over the last five years, ahead of its target for 20 percent. Gross margins in DTC have likewise expanded over the last five years by 300 basis points to 60 percent due to channel mix changes.

Despite the 40 percent premium offered from Anta, Amer’s shareholders may still have some reluctance to accept the offer because Amer’s shares have performed below the market’s average due to two difficult years and may not be fully pricing the recent improving trend and bullish prospects.

Both  profitability and sales “slowed” in 2016 and 2017 as shares of Amer are up only 10 percent since 2016.

Takala said the reason for the shortfall over the last two years was because the U.S. missed its target growth rate. Amer lost more than 1,000 distribution doors given the bankruptcy of The Sports Authority and others in the marketplace. Sales have been flat in the U.S. market for the last two years, but Takala said the U.S. is returning to its target of mid-single digit growth.

Amer’s CEO also said investments into digital, fitness and sports instruments were made in those years to boost sales but the payback took longer than expected. Said Takala, “There was a delay, but today, I’m much more relaxed. I can say it’s starting to yield, but it took a toll on our top line and profitability versus the line we had been on.”

Photo courtesy Amer Sports