Adidas/Reebok MergerOctober 8, 2009Collin ShawKelly TruesdaleMichael RocketteBenedikte SchmidtSaravananSadaiyappan

Key TakeawaysWhat value does Reebok add to Adidas?How should Adidas value Reebok and with what synergies?Has the merger been a success or failure?

AgendaAdidas & Reebok BackgroundAcquisition BackgroundIndustry OverviewSWOT AnalysisValuation ModelSynergiesIntegration PlanPost IntegrationConclusions

AdidasFounded in 1926World leader in soccer shoes#2 behind Nike worldwide - #4 in the USThree acquisitions before Reebok:Company Sports Inc in 1993 Salomon in 1997 Arc'Teryxin 2002Culture of control, engineering, and production

ReebokFounded in 1895First athletic shoe for woman#2 in US - #4 in EuropeStrong sales growth from 2002-2004Unique portfolio of long term league licenses Creative marketing-driven culture

Industry OverviewOne of the most competitive industries.Over 75% of the industry controlled by branded items.Large players supplier power and access to shelf space.Small players anticipating a fashion trend.Private label a threat.

US Footwear Market

Expected TrendExpected growth rate ~9%Change from Supply Push to Demand Pull model.Blurring line between sport wear and active wear.Demand for athleisure shoes.

Acquisition BackgroundGoal: increase share in the U.S. market + better compete with NikeStock prices improved the day of announcementReebok sales down in fourth quarter of 2005Deal closed on January 2006Price: $3.52 billion

SWOT AnalysisStrengthsAdidas is strong in Europe, Reebok is strong in US, & AsiaComplementary licenses and contractsReduced costs for retailersReebok is extremely strong in Womens wear

WeaknessesMany overlapping productsTwo HQs that will be hard to integrateTwo very strong, distinct corporate cultures

SWOT AnalysisOpportunitiesLeverage combined R&D strengths & budgetsBring Reeboks womens wear to EuropeReduce costs to retailers by larger distribution networksAbility for better reaction to global trendsThreatsCompetition between brands employeesCannibalization of salesRealization of revenue growth synergiesAdidas may treat Reebok as a second tier brand

Valuation Model Assumptions

Reebok WACCMarket Risk Premium5.00%Multiplied by: Reebok Levered Beta1.371Adjusted Market Risk Premium6.90%Add: Risk-Free Rate of Return4.30%Cost of Equity11.20%Multiplied by: Reebok Equity %83.30%Cost of Equity Portion9.30%Pre-Tax Cost of Debt7.30%Effective Tax Rate30.90%Cost of Debt5.00%Multiplied by: Reebok Debt %16.70%Cost of Debt Portion0.80%WACC10.10%

Valuation Model

200020012002200320042005E2006E2007E2008E2009E2010ETotal Revenues2865.242992.883127.873485.323785.284057.824349.994663.194998.945358.865744.70Annual Growth4.5%4.5%11.4%8.6%7.2%7.2%7.2%7.2%7.2%7.2%EBITDA216.37221.06247.48288.00333.19323.94350.74379.75411.16445.17482.00Annual Growth2.2%12.0%16.4%15.7%-2.8%8.3%8.3%8.3%8.3%8.3%Margin7.6%7.4%7.9%8.3%8.8%8.0%8.1%8.1%8.2%8.3%8.4%Less: Depreciation46.2036.6232.0335.6438.8547.9551.4155.1159.0863.3367.89Margin1.6%1.2%1.0%1.0%1.0%1.2%1.2%1.2%1.2%1.2%1.2%EBIT170.17184.44215.45252.36294.35275.99299.33324.64352.09381.84414.11Annual Growth8.4%16.8%17.1%16.6%-6.2%8.5%8.5%8.5%8.5%8.4%Margin5.9%6.2%6.9%7.2%7.8%6.8%6.9%7.0%7.0%7.1%7.2%Less: Income Taxes49.0048.3060.5772.1268.4985.2892.49100.31108.79117.99127.96Effective Tax Rate36.1%31.0%31.0%30.8%25.8%30.9%30.9%30.9%30.9%30.9%30.9%Unlevered Net Income121.17136.14154.88180.25225.86190.71206.84224.33243.29263.85286.15Plus: Depreciation46.2036.6232.0335.6438.8547.9551.4155.1159.0863.3367.89Less: Capital Expenditures-29.16-27.40-27.61-44.48-55.46-45.10-48.35-51.83-55.56-59.56-63.85Margin-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 NWC33.3942.4859.51-70.58-24.6114.7115.7716.9018.1219.4320.82Margin1.2%1.4%1.9%-2.0%-0.7%0.4%0.4%0.4%0.4%0.4%0.4%Free Cash to Equity171.60187.84218.82100.83184.63208.27225.66244.51264.93287.05311.01Annual Growth9.5%16.5%-53.9%83.1%12.8%8.4%8.4%8.4%8.3%8.3%189.1641266186.1611281183.2043614180.2931545177.4268439AssumptionsEquity Value CalculationWACC10.1%PV of 5-Year Estimates916.25Revenue Growth7.2%PV of Terminal Value2234.44Tax Rate30.9%Enterprise Value3150.69Terminal EV/EBITDA7.50xLess: Net Debt41.30Equity Value3191.99MarginsInitialGrowthEBITDA8.0%1.0%Shares Outstanding59.21Depreciation1.2%0.0%Implied Value Per Share53.91CAPEX-1.1%0.0%Premium to Market Price26.8%NWC0.4%0.0%Implied Perpetual FCF Growth1.5%

SynergiesGeographies and CategoriesIdea sharing across markets and geographiesCapitalize on Reebok's skills and know how to accelerate Adidas position in North AmericaBenefit from Adidas expertise in Europe and Reebok's in AsiaCombine expertise in branded and licensed athletic apparel

Consumer & DemographicsAbility to identify sport/style trendsBetter product and category prioritizationMore products and more price pointsContinue brand developments into new segmentsBenefit from Reebok's expertise in Women's segmentCapitalize from Reebok's skills in sport lifestyle and leisure

Synergies contdTechnologyEnhance profile as technology leader and innovation leaderBigger combined R&D spendMore products to capitalize on R&D spendingNew technology developments and awareness across brandsApplicationsMaterials

Licenses, Events and TeamsTransfer of skills and know-howManagement of exclusive agreementsRelationship with teams and athletesMore active events calendar

Synergies contdDistribution ChannelsCapitalize on Adidas in-depth understanding of specialized sporting goods channelBenefit from Reebok's strong insights into department store and general merchandise channelSelective Channel DiversificationExpand on retail initiatives in emerging markets

Operating EfficienciesSales, Marketing & Distribution 40% of SynergiesHigher efficiency through combined sales and marketing scaleBetter utilization of available distribution capacityAdmin Services & IT 40% of SynergiesSimplify overlapping functionsRemove Duplicative IT FunctionsOperations and Sourcing 20% of SynergiesGreater economies of scale in global sourcingImproved warehousing facilities

Combined Valuation w/o Synergies

2005E2006E2007E2008E2009E2010ETotal Revenues12388.4613097.1613847.7114642.6915484.8016376.94Annual Growth5.0%5.0%5.0%5.0%5.0%5.0%EBITDA1191.141259.281331.451407.881488.851574.63Annual Growth5.7%5.7%5.7%5.8%5.8%Margin9.6%9.6%9.6%9.6%9.6%9.6%Less: Depreciation63.5567.1871.0375.1179.4384.01Margin0.5%0.5%0.5%0.5%0.5%0.5%EBIT1127.591192.101260.411332.771409.421490.62Annual Growth5.7%5.7%5.7%5.8%5.8%Margin9.1%9.1%9.1%9.1%9.1%9.1%Less: Income Taxes398.04420.81444.93470.47497.52526.19Effective Tax Rate35.3%35.3%35.3%35.3%35.3%35.3%Unlevered Net Income729.55771.29815.49862.30911.89964.43Plus: Depreciation63.5567.1871.0375.1179.4384.01Less: Capital Expenditures-129.55-136.96-144.81-153.13-161.93-171.26Margin-1.0%-1.0%-1.0%-1.0%-1.0%-1.0%Less: Increase in NWC-11.21-11.85-12.53-13.25-14.01-14.81Margin-0.1%-0.1%-0.1%-0.1%-0.1%-0.1%Free Cash to Equity652.34689.66729.18771.04815.39862.36Annual Growth5.7%5.7%5.7%5.8%5.8%594.1175943572.0443788550.8437832530.4798466510.9181283AssumptionsEquity Value CalculationWACC9.8%PV of 5-Year Estimates2758.40Revenue Growth5.0%PV of Terminal Value7893.25Tax Rate35.3%Enterprise Value10651.66Terminal EV/EBITDA8.00xLess: Net Debt-922.73Equity Value9728.93Shares Outstanding183.44Implied Value Per Share53.04Premium to Market Price16.9%Implied Perpetual FCF Growth3.0%

Combined Valuation w/ Synergies

2005E2006E2007E2008E2009E2010ETotal Revenues12398.4613147.1613947.7114892.6915984.8016876.94Annual Growth5.0%5.0%5.0%5.0%5.0%5.0%EBITDA1192.101264.091353.561516.921686.921772.70Annual Growth6.0%7.1%12.1%11.2%5.1%Margin9.6%9.6%9.7%10.2%10.6%10.5%Less: Depreciation63.5567.3971.4976.3381.9386.50Margin0.5%0.5%0.5%0.5%0.5%0.5%EBIT1128.551196.701282.071440.591604.991686.20Annual Growth6.0%7.1%12.4%11.4%5.1%Margin9.1%9.1%9.2%9.7%10.0%10.0%Less: Income Taxes398.38422.44452.57508.53566.56595.23Effective Tax Rate35.3%35.3%35.3%35.3%35.3%35.3%Unlevered Net Income730.17774.27829.50932.061038.431090.97Plus: Depreciation63.5567.3971.4976.3381.9386.50Less: Capital Expenditures-129.55-137.38-145.74-155.61-167.03-176.35Margin-1.0%-1.0%-1.0%-1.0%-1.0%-1.0%Less: Increase in NWC-11.21-11.88-12.61-13.46-14.45-15.25Margin-0.1%-0.1%-0.1%-0.1%-0.1%-0.1%Free Cash to Equity652.96692.39742.64839.32938.89985.87Annual Growth6.0%7.3%13.0%11.9%5.0%594.6841559574.3122366561.0123429577.4526079588.3039321AssumptionsEquity Value CalculationWACC9.8%PV of 5-Year Estimates2895.77Revenue Growth5.0%PV of Terminal Value8886.16Tax Rate35.3%Enterprise Value11781.92Terminal EV/EBITDA8.00xLess: Net Debt-922.73Equity Value10859.19Shares Outstanding183.44Implied Value Per Share59.20Premium to Market Price16.9%Implied Perpetual FCF Growth2.8%

Actual Acquisition StatisticsAdidas paid $3.527 billion for ReebokAdidas paid $59.00 per share for all of Reeboks sharesAdidas paid a 34.2% premium which was still accretive to the P/E ratioBased on our model Adidas could have paid between $53.91 & $66.85

Integration IssuesManagement /Structure ChangesNew Brand CEOs and Reebok CEO to AdvisorHead Quarters to RemainIntegration planning team comprised of employees from bothEmployee Care and RetentionMixed employee benefitsHR resources to all employeesDistribution Centers and Back OperationsCombined many Distribution Centers and Back OperationsReebok switched from a Bulk Pre-Order system to Pay-as-You-goConsolidate Suppliers

Integration IssuesResearch & DevelopmentCombined to share both costs and technologyReduced employees and raised efficienciesBrand Imaging to Reebok as Premium ShoeNew Pay-as-You-go system reduces retailer sales on ReebokCustomize shoes through a websiteIncrease PricesReduce manufacturing of Classic StylesGeographies and Product LinesIncreased international presence and product lines (i.e. shoes & apparel)Licenses, Events and TeamsVery similar strategy for both brands but Adidas gets Reebok NBA contract

Post-Integration ResultsManagement/Structure ChangesSuccessful through speed, efficiency and cooperationEmployee CareHandled as well as could be expectedDistribution CentersMixed Emotions in short term, spent money to become efficientTaking longer than anticipatedR&DSuccessful at reaching companies goals on new products & efficiency

Post-Integration ResultsBrand ImagingContinue to face uphill battle and challengeSuccess is still possible in long termGeographies and Product LinesExpansion into new countries has partially offset loses in mature marketsNew product lines and strategies have produced mixed resultsLicenses, Events and TeamsWith little change no success or failure has been noticed

Did the merger work?Our focus this year will be on getting Reebok back onto a growth track. It's going to take time, but we're moving in the right direction.- Herbert Hainer, Adidas Chief Executive in 2007Gross margins dropped 3.6% in 2007.Sales and order back log of Reebok declined. The whole group still made money.

What went wrong?Misperception among Retail Partners about the future of Reeboks brand strategyQuestions about the German American Corporate Culture.Underestimation of competition from Nike.

Whats happening now?In 2008, Adidas put in an extra $50 million to bring back Reebok on track.Started realizing some of the synergies in late 2008 but on a lower scale than estimated.

Q&A

Benedikte*Benedikte*Collin Shaw*Saravanan*Michael*Kelly*Kelly*Benedikte*Collin*Saravanan*Michael*Kelly*Kelly*Benedikte*Collin*Saravanan*Kelly*Kelly*Michael*Benedikte*Collin*Saravanan*Michael*Kelly*Saravanan*Collin*Collin*