M&A Deals Equity Research

The race for Reebok

Despite acquiring Reebok over a decade ago, Adidas are still struggling to make the gains from the brand it desired, leading to the consideration of a potential sale of the subsidiary. Shares of Adidas rose 1.9% on Thursday, due to multiple reports of the German footwear brand exploring the possibility of a sale. Private equity firms, such as Permira and Triton, are already taking a strong interest in the sportswear brand and are ready to snap up Reebok, with its retro reputation providing a positive outlook due to current trends among younger consumers. But is letting go of what may soon become a rival once again a bad move for Adidas?

Adidas (correct as of 8/11/2020)

Founded: 1920

Sector: Consumer cyclical — footwear & accessories

CEO: Mr. Kasper Bo Rorsted

Share price: $165.41

Market cap: $62.503bn

A tough match from the outset

In 2006, Adidas acquired Reebok in a €3.1bn deal, with Adidas wanting to turn around the struggling US brand and consequently increase its market share against industry leader Nike. At the time, Adidas did not have a strong history of achieving this type of objective, selling ski maker Salomon in 2005 after purchasing the company with the same turnaround goal in mind in 1997, which proved an unsuccessful endeavour. However, Adidas saw an opportunity within Reebok and pursued the takeover: benefiting from the brands outfitting rights to the National Basketball Association, deals to provide uniforms to the American National Football League, and more.

However, the two brands have ended up in an awkward and uneven relationship. Reebok has relinquished some of its core marketing assets to Adidas and do not have much to stand on by itself, with the brand arguably slipping out of fashion since the acquisition. 4 years ago, Adidas launched a turnaround of Reebok and said it aimed for profitability by 2020, however with revenues down 42% in the second quarter of this year, the prospects of achieving this goal are not looking promising. Despite the numerous restructurings Reebok has undergone over the years, they still remain a fraction of the Adidas group’s overall revenue — its 2019 sales made up just 7% of Adidas’ €23.6bn total revenue.

Time to forfeit?

So it is clear over the past decade Reebok has been struggling as part of the Adidas family, and then the pandemic arrived and has hit the industry hard. In the first half of 2020, Adidas’ revenues fell 26.9% to €7.56bn and competitor Nike’s revenues were hit hard as well in the last two quarters, falling 19% but with a larger monetary fall of $16.9bn. Even in these turbulent conditions, it could be the right time for Adidas to sell. Companies are looking at what their strengths are and where they see the most potential, going on to then cut away the rest. If Adidas was to follow this mentality, selling Reebok seems the obvious move.

Also, from a buyer’s perspective, it may be a well-timed opportunity. A flood of money to support markets has many buyers with money in hand looking to pick up assets at a bargain price (see Courtney Ewart’s DW Sports article). Many see Reebok as a good potential candidate for this type of buy, a well-known brand with the possibility of improved future prospects.

Chasing down Reebok

Two of the main private equity firms eyeing up the potential takeover candidate are Permira and Triton, but the plans are in very early, exploratory stages and there is no certainty an offer from either firm will materialise. But there is also considerable interest from plenty of blank-cheque companies looking for potential deals.

Permira, a London-based firm, is well versed in buying companies of this type, having a record of buying footwear and apparel brands. They currently own Dr. Martens, the maker of classic punk-style boots. To further add to the collection, in February they paid €1.3bn to acquire the trendy footwear brand Golden Goose — who are known for selling distressed trainers for as much as £1,000. So Reebok would slot nicely into this experienced firm’s portfolio.

Triton, on the other hand, would be making quite a departure from its comfort zone in the purchase of Reebok. Its portfolio is currently heavily dominated by European manufacturing, healthcare, and business services companies. But this could be a cheap opportunity to diversify its portfolio and a first venture into a new market for Triton.

Game set and match?

The sale of Reebok is still far from set in stone. In March 2021, Adidas is set to lay out its next five-year strategy plan; by then it will be necessary to have a concrete decision on the next steps for Reebok. Chief executive Kasper Rorsted has long wanted the sale of the subsidiary, but with the “retro” style becoming increasingly popular among consumers, it is not the time for a rash decision. For Adidas, it is largely the case of a trade-off between potential financial benefits and the possible risk of spinning-off a brand that may once again rise to be a rival to Adidas in an already very competitive market.


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