Adidas to buy Reebok for $3.8 bln

Adidas to buy Reebok for $3.8 bln

By Ulf Laessing
Wed Aug 3, 6:47 PM ET

FRANKFURT (Reuters) - Germany's sporting goods maker Adidas-Salomon (ADSG.DE) has agreed to buy U.S. rival Reebok (NYSE:RBK - news) for $3.8 billion in a move to close the gap on Nike and promise a profit increase by expanding in the United States and entering new markets.

The world's second- and third-biggest sports goods companies said Wednesday Adidas would buy the outstanding shares of Reebok for $59 per share in cash, a 34 percent premium to Reebok's closing share price Tuesday.

The combination will create a more formidable competitor to battle Nike's dominance of the market for athletic gear, particularly in the United States, which accounts for 50 percent of the sports footwear market alone.

Nike holds an estimated 36 percent share of the U.S. market, followed by Reebok at 12.2 percent and Adidas at 8.9 percent, according to John Horan, publisher of industry newsletter Sporting Goods Intelligence.

The combination will give Adidas and Reebok increased leverage with retail outlets in the all-important U.S. market and allow the brands to more directly challenge Nike on its home turf.

"The deal makes sense to us at first pass given Adidas' stated goal of increasing market share in the U.S. and its rivalry with Nike," Prudential analyst Lizabeth Dunn wrote in a research note. "On the margin this looks like bad news for Nike, which has dominant share in major retail accounts."

Nike spokesman Alan Marks said the company does not expect to change the way it does business in a traditionally competitive market.

"We always feel we win in our business when we stay focused on our strategies and our customers," Marks said. "It has always been a competitive business and it will continue to be a competitive business."

Reebok, based in the Boston suburb of Canton, Massachusetts, will bring key equipment licensing contracts with major North American professional sports leagues, including the National Football League, National Basketball Association, National Hockey League and Major League Baseball.

Also coming aboard are top endorsement contracts with NBA stars like Allen Iverson and Yao Ming.

Both boards agreed to the takeover, which will create a company with combined annual sales of some $11.1 billion. Nike's sales in its 2004/05 business year to May were $13.7 billion.

Reebok shares surged 32 percent to $58 on Instinet ahead of the 1330 GMT New York open, while Adidas was up 5.7 percent at 156 euros in much higher volumes than usual by 1153 GMT after it painted a bright outlook for the merged firm in a conference call.

Nike shares closed up 1.27 percent at $86.92 on the New York Stock Exchange.

Adidas stock had initially dropped 4 percent on the news, as some analysts questioned the deal's benefits and cost.

The takeover complements Adidas's strengths in Europe with Reebok's strong position in the United States.

"The deal makes sense. In one go, both brands are expanding significantly in Asia, North America and Europe," said HVB analyst Uwe Weinreich.

Puma, the world's fourth-biggest sporting goods company, last week also unveiled aggressive expansion plans through acquisitions and entry of new sportswear markets.

Adidas said it was confident Reebok's shareholders would approve the deal, which includes Reebok's net cash position of $84 million.

INCOME, SALES BOOST

Adidas said the deal with Reebok, which it expects to close in the first half of next year pending antitrust and shareholder approval, would boost net income of the new Adidas Group by more than 10 percent per year in the medium term.

Sales are seen growing at a mid- to high-single-digit rate, and cost savings are expected to reach $150 million annually by the third year after the deal closes.

Adidas said it expected no significant restructuring costs and that they would quickly be outweighed by synergies.

The deal includes a provision for a $100 million break-up fee payable to Adidas if the acquisition is terminated under certain circumstances. If the deal is terminated because it is blocked by antitrust authorities, Adidas may be required to pay Reebok a fee of $75 million, according to a Reebok regulatory filing.

Dresdner Kleinwort Wasserstein raised its investment view to "buy" from "add," saying Adidas' margins would grow.

In the key U.S. market -- where Adidas has repeatedly changed strategy to attack market leader Nike -- Adidas and Reebok said sales would double as Adidas gets access to Reebok's popular basketball, American football, hockey and womenswear products.

"North America is the market where you have to be," Adidas Chief Executive Herbert Hainer told a conference call.

In the second quarter, Adidas's sales grew in all regions except Europe, meeting expectations by rising 8.2 percent to 1.52 billion euros.

Net income rose 33 percent to 94 million euros ($116 million), when adjusted for the sale of Salomon -- beating the average estimate of 86 million euros forecast in a Reuters poll of 18 analysts.

For 2005, the Bavarian firm reiterated net income from continuing and discontinued operations would rise 20 percent.

Analysts said Adidas would also benefit from Reebok's strong lifestyle fashion business. Reebok Chairman and CEO Paul Fireman will continue to run the Reebok brand.

(Additional reporting by Georgina Prodhan and Natalia Matter and the San Francisco Bureau)

($1=.8121 euro)