A New Ball Game: Adidas-Reebok Deal to Create $11B Giant

Adidas' blockbuster deal to buy Reebok International for $3.8 billion will alter the global athletic landscape and create a challenge for Nike.

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NEW YORK — The activewear race just got a lot tighter.

In a deal that caught retailers, analysts and competitors by surprise, Adidas-Salomon confirmed Wednesday that it will buy Reebok International for $3.8 billion in cash, creating an athletic giant to challenge Nike with more than $11 billion in sales and making the already wealthy Paul Fireman, chairman and chief executive of Reebok, even richer. Fireman and his wife own about 17 percent of Reebok’s stock, meaning they would get almost $600 million just in share sales from the deal.

Fireman told WWD Wednesday that he will stay with the new company through the acquisition and then take on a different, more strategic role in the company and a successor from within will take over day-to-day operations.

“It wasn’t an easy decision. I don’t know if it will be harder to sell or harder later on to leave,” he said in a phone interview about the sale, although he gave no time frame on when he might depart.

The acquisition immediately closes the gap between Adidas and Nike, which has sales of $13.7 billion, and solves the German company’s long-running problem of how to grow in the American market. It also is expected to help Adidas and Reebok grow their apparel businesses, seen as a key to further expansion and an area on which both have placed an increased emphasis in recent seasons. Adidas has agreements with designers Stella McCartney and Yohji Yamamoto, as well as Missy Elliott, while Reebok works with stars such as Jay-Z and has apparel licenses for key sports leagues.

By acquiring Reebok, Adidas would almost double its sales in the U.S. Last year, Adidas had a volume of about $1.9 billion in the U.S., while Reebok’s domestic sales were $1.6 billion.

The deal is valued at $3.8 billion, including the assumption of net cash of $84 million. The combined company will have revenues of about $11.1 billion. Under the terms of the deal, Adidas will pay $59 a share for all of Reebok’s outstanding stock, a premium of 34.2 percent on Tuesday’s closing price. Reebok shares soared 30 percent on the news, to close at $57.14, a 52-week high.

This story first appeared in the August 4, 2005 issue of WWD.  Subscribe Today.

“This acquisition is a giant step forward in the evolution of our group strategy, and this is a milestone for our company,” Herbert Hainer, Adidas’ ceo, said on a conference call Wednesday. “We see a lot of benefits in combining these two powerful companies. They both have strong identities and heritage and yet they complement each other very well. We see an opportunity to capitalize on Reebok’s proven North American strength to help spur Adidas’ progress in that market.”

He stressed the companies would maintain their separate identities and focus, and said he doesn’t expect significant job cuts. Fireman, who is 61, is to continue as Reebok’s ceo and Reebok will remain in Canton, Mass., until the acquisition and through the closure. He said the company will keep the same name, and that he will report to Hainer.

The reporting structure raised immediate questions over how Fireman will adapt. He’s well known for being a hands-on manager used to getting his way and one who ran through a string of heirs-apparent because of his reluctance to give up the reins.

Some believe the deal could hasten Fireman’s retirement, although on Wednesday, he said: “I have no timeline for retirement.”

“This was not a forced issue,” he said on a call with reporters. “Reebok is very healthy. We felt this was an opportunity that happens once in a lifetime and this was the right moment. I have a legacy and a lot of years at the company, and I wanted to make sure it would live forward in the most prosperous way.”

The acquisition also would meld two companies with distinctly different cultures. Adidas, based in the tiny German town of Herzogenaurach, is best known for its performance offerings and rich sports heritage, with products for running and tennis. Reebok, a distinctly American firm despite its British origins, has steadily built up its offerings for younger customers by signing on top-name hip-hop artists such as Jay-Z and Nelly, and developing trendy fashion footwear. Many people still associate the brand with its heyday in the Eighties and its popular aerobics sneakers.

Being part of the Adidas fold should help boost Reebok’s apparel offerings, though, since Adidas has had more success in that area and Reebok has struggled with its branded business.

“In branded apparel, Adidas’ leadership can be put to use in helping Reebok to quickly expand its profile in this category,” Hainer said. “In licensed apparel, Reebok’s experience and skills can now be employed to get the most out of Adidas’ collegiate league license assets.”

On Wednesday, analysts and retailers were digesting the deal, which creates a megagroup crossing multiple categories. In the U.S., the two companies largely share the same distribution in specialty sports stores and athletic chains.

Matthew Serra, chairman and ceo at Foot Locker, the nation’s largest footwear chain, said, “Our current relationships with both companies are strong and we would expect that a merger would not impact our partnerships.”

Few experts expect Nike to suffer significantly from the Adidas purchase of Reebok, however, since retailers aren’t likely to alter how much they carry of the leading athletic brand. A Nike spokesman declined to comment specifically on the deal Wednesday, but said: “Nike is focused on growing our business.”

Meanwhile, Nike is said to be interested in Callaway Golf Co., the Carlsbad, Calif.-based company that owns Callaway Golf, Odyssey, Top-Flite and Ben Hogan. The company recently said it has hired Lazard Ltd. to explore its options.

Analysts were generally positive about the acquisition, but expressed some concern about how it would affect Adidas shareholders and whether the price was too high.

“One thing is clear: It looks [like] a great deal for Reebok, as it would have taken many years, if ever, for earnings to support a $59 stock price,” Margaret Mager, an analyst with Goldman Sachs, said in a report. “For Adidas shareholders, we think this is a large nut to swallow and speaks to the difficulties it has had competing with Nike.”

Christian Schindler, an analyst at Landesbank Rheinland-Pfalz, an investment bank based in Mainz, Germany, said, “There are positives and negatives. The main positive point is the brands are complementary. Where Adidas has strengths, Reebok has weaknesses and vice versa. Adidas is strong in the performance sector, whereas Reebok has a strong offer linked with music, hip-hop, items for women and lifestyle goods.

“The price is expensive, however, and there’s risk involved in the implementation of the acquisition. The companies are of two different cultures and German companies often have difficulties when they acquire American ones.”

Paul Altman, vice president at the investment banking firm The Sage Group, observed, “Adidas has wanted for a long time to grow the U.S. market, and this transaction is a natural step [in that direction].”

Altman said footwear firms are following apparel firms and looking at acquisitions as a way to grow, noting that the sectors have the same consumer and retail forces at play.

Todd Lavieri, ceo of Archstone Consulting, said, “The real advantage for Reebok and Adidas is that it gives them more clout with retailers and, from a sourcing perspective, more leverage with purchasing, licensing and promotions.”

He cautioned, however, that while both are healthy and strong companies, the merger has to quickly focus on consumer needs. The firm can’t let transatlantic issues get in the way, such as how best to merge the cultural differences in their operations.

“Nike right now has no distraction and continues to roll out product. The Adidas/Reebok merger needs to move quickly to be successful … They can’t spend too much time working on internal issues that [typically] come up with these types of transactions. Adidas needs to be able to get up and [start] running this year to show progress next year,” Lavieri explained.

David Dandel, managing director at D.A. Davidson, said he was surprised two competing companies would agree to merge.

“Acquisitions are usually successful when you put two complementary brands together — maybe one higher-end brand and one low-end brand,” Dandel said. “This acquisition is interesting because they compete quite a bit head-to-head and they go through pretty much the same distribution channels, and the target customer is the same.”

The acquisition gives Adidas more entry into youth culture and into categories and business segments where it hasn’t traditionally had a large presence. Reebok, in addition to its core Reebok brand, also owns the Rockport and Greg Norman labels, and had been making product for Polo Ralph Lauren until it sold back that license this year, in addition to its lines with celebrities.

Adidas has a line with Missy Elliott, which marked the first time the company had endorsed a celebrity for a lifestyle line. It also has collaborative collections with Stella McCartney and Yohji Yamamoto.

Hainer said on the call that the companies could possibly overlap some of their athletes and celebrity endorsers. Adidas-sponsored athletes include Andre Agassi and David Beckham, while Reebok sponsors Allen Iverson and Yao Ming.

Reebok is also the supplier of the National Hockey League, National Football League and the National Basketball Association, while Adidas is best known for its products in sports such as soccer, tennis and running. Earlier this year, Adidas said it would sell its Salomon ski division to Finnish sports equipment company Amer Sports Corp. for $625.6 million, which will help generate some of the cash needed to buy Reebok. That deal is expected to close by the end of next month.

The deal follows recent trends in the athletic sector, which has seen a number of high-profile mergers in recent years. The combined company will likely have more leverage with stores and suppliers. Adidas and Reebok each have high name recognition and were numbers 14 and 15, respectively, in the WWD100 list of the most recognized brands.

The Reebok acquisition seems to have been in the works for some time. Hainer said on a call Tuesday morning that he met Fireman during the 2004 Summer Olympics in Athens and talks evolved from there.

Fireman acquired the North America distribution rights to Reebok in 1979 and has guided its growth for the last 25 years, although he stepped down a few times only to return again. Last year, Reebok had sales of $3.8 billion and the company said recently that it anticipates overall profit gains of 30 percent in 2005.

Reebok also has a new deal with Target Stores that gives Adidas a broader distribution target, since the firm has never had a brand in the discount channel. Nike also is addressing this channel with its Starter line of products.

Adidas said the Reebok acquisition will boost earnings in the first full year after closing and sees annual costs savings of $150 million by the third year after closing. The companies believe the transaction will close in the first half of next year.

Nike Inc.
2004 Sales: $13.7 billion
Market Cap: $22.8 billion
Key Celebrity/Athlete Endorsements: LeBron James, Maria Sharapova, Tiger Woods
Brands: Nike, Converse, Cole Haan, Hurley, Starter, Air Jordan, Bauer Hockey
Employees: 23,000

Adidas-Salomon AG
2004 Sales: $8.3 billion
Market Cap: $6.9 billion
Key Celebrity/Athlete Endorsments: David Beckham, Missy Elliott, Andre Agassi
Brands: Adidas, Salomon, Adidas by Stella McCartney, Y-3 By Yohji Yamamoto, Respect M.E., Taylor-Made
Employees: 14,217

Reebok International Ltd.
2004 Sales: $3.8 billion
Market Cap: $3.4 billion
Key Celebrity/Athlete Endorsements: Allen Iverson, Yao Ming, Jay-Z, 50 Cent, Nelly
Brands: Reebok, Rbk, Greg Norman, Rockport, Koho
Employees: 9,102

— With contributions from Vicki M. Young and Meredith Derby, New York, and Brid Costello, Paris

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