Adidas buy of Reebok would boost U.S. market share

Updated: August 3, 2005, 3:40 PM ET
Associated Press

FRANKFURT, Germany -- By combining Adidas' popularity in Europe among soccer and athletics fans with Reebok's appeal to U.S. fans of basketball and football, the architects of the $3.8 billion sportswear and athletic gear deal hope to create a more muscular rival to world leader Nike.

Adidas-Salomon AG said Wednesday it has agreed to buy Reebok International Ltd. for $59 a share that combines two major brands with links to both athletics and lifestyle. That was a healthy 34 percent premium over Reebok's closing price Tuesday.

While Nike Inc. still has the clout to stay on top, it will face a fiercer challenge from a company that will combine their strengths to grab more market share and gain access to bigger markets.

"Adidas-Reebok will make inroads against Nike by presenting a stronger fashion brand, which will also gain wider support and endorsement deals," said Faith Hope Consolo of Prudential Douglas Elliman. "When they present this united brand, they will have the luster to get more endorsements from high-profile athletes."

"Separately they had a very small niche, but together Adidas and Reebok will have a global presence to compete one-on-one with Nike," she said.

At the same time, neither company is forfeiting their own brands. Adidas Chairman and CEO Herbert Hainer said the brands would stay separate but complement each other -- a move that is likely to help them in their competition with Nike.

German-based Adidas has its roots in soccer and track and field, while Reebok's line of sneakers and athletic gear is visible across American sports like football, baseball and basketball.

Combining the two, executives said, will mean more access to athletic events just about anywhere there is a stadium.

"This portfolio will present us in all the major sport categories around the world. Reebok is extremely strong in the American sports like NFL, NBA -- and Adidas is very strong in the FIFA world cup, the Olympic Games and the European Champions League," Hainer said.

"Two brands individually will add to the value," said Chairman and CEO Paul Fireman of Reebok, which is based in Canton, Mass.

But two brands does not guarantee first place, warned Patrick A. Gaughan, president of the New York-based Economatrix Research Associates Inc.

"One factor which seems to play an important role in market success is being of a critical size and being in the No. 1 or No. 2 market share slots. It is very tough to compete with a dominant firm when you have a market share much smaller than it," he said. "I think this is the case for both Reebok and Adidas -- especially in the lucrative U.S. market."

Nike's annual sales are approximately $14 billion worldwide. Adidas has about $8 billion in annual sales while Reebok has nearly $4 billion.

"This is really exciting; it is the first time in that Adidas really has a shot to seriously challenge Nike, which is weak right now from management problems," said Erich Joachimsthaler, CEO of marketing strategy company Vivaldi Partners.

But Adidas must be prepared to handle the larger team of brands, said Joachimsthaler, who worked with Adidas in the early 1990s as a consultant.

"Adidas' focus is technology and performance development, where Reebok is purely sales driven," he said. "The will also have to deal with uniting two companies with almost polar opposite business cultures."

Adidas, turning from a sports shoe company into a lifestyle/entertainment company, must also be careful not to lose its loyal athletes, he said -- "there is a fine line between fashion and sportswear."

Reebok has endorsement deals with NBA players Allen Iverson and Yao Ming, said Gaughan, and Adidas has strengths in more international sports like soccer -- including David Beckham and the team Real Madrid.

While Nike, based in Beaverton, Ore., has endorsement deals with young basketball stars like Carmelo Anthony and LeBron James, Gaughan said, "neither is a Michael Jordan, and the NBA is not what it once was when it had Jordan, [Larry] Bird and Magic Johnson."

Investors cheered the deal. Reebok shares rose $13, or 29.6 percent, to $56.95 in late trading on the New York Stock Exchange, while investors pushed Adidas up 7 percent to 158.20 euros ($192.96) in Frankfurt. Nike shares gained 93 cents to $86.76 on the NYSE.

Gavin Finlayson, an analyst with Commerzbank, said the teaming would give the combined company more muscle in the retail market.

"Adidas, in conjunction with Reebok, has the potential to say, 'We want better terms or conditions or we'll take our business elsewhere,"' Finlayson said.

Consolo said it would also give the companies more reach into different stores.

"Adidas and Reebok will absolutely be able to compete on both a specialty store and department store basis. This will increase not only their market share, but their allocated space within department stores," she said.

The deal is subject to regulatory approval in the United States and Europe as well as by shareholders. The companies said the transaction could close during the first half of 2006.

Adidas said it did not expect any significant reductions in the work forces of both companies. Chief Financial Officer Robin Stalker said the deal would likely lead to little if any significant restructuring costs.

The deal came as Adidas posted a 30 percent profit gain to 67 million euros ($81.7 million) in the quarter ended June 30, up from 45 million euros a year earlier. Sales rose to 1.52 billion euros ($1.85 billion) from 1.4 billion euros.


Copyright 2005 by The Associated Press

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