Adidas targets Nike by bringing Reebok into the fold
(AP)
Updated: 2005-08-04 10:41

The Adidas-Reebok combination announced Wednesday could have a clear shot at market leader Nike by combining Adidas' popularity in Europe among soccer and athletics fans with Reebok's appeal to U.S. basketball and football fans.

Adidas-Salomon AG will acquire Reebok International Ltd. in a friendly takeover worth euro3.1 billion (US$3.8 billion), or US$59 a share, that combines two major brands with links to both athletics and lifestyle.

While Nike 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."

At the same time, neither company is forfeiting their own brands, the Adidas and Reebok executives said. 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.

Adidas has its roots in soccer and track and field, while Reebok's line of footwear 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," he said.

"Two brands individually will add to the value," said Reebok Chairman and CEO Paul Fireman, who led the company to a period of dominance over Nike during the fitness boom of the 1980s.

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 then 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 in the U.S. are approximately US$14 billion (euro11.37 billion). Adidas has about US$8 billion (euro6.5 billion), while Reebok has US$4 billion (euro3.25 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.

The merger will give Adidas important cost efficiencies and a huge U.S. market share, he said, as well as benefits from cross-leveraging their brands.

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 Allan Iverson and Yao Ming, said Gaughan, and Adidas has strengths in more international sports like soccer _ including Real Madrid and David Beckham.

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

Investors cheered the deal, sending shares of Reebok up 29 percent to US$56.74 (euro46.53) in New York Stock Exchange trading, while investors pushed Adidas up 7 percent to euro158.20 (US$192.96) in Frankfurt.

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. Both companies said the transaction could close during the first half of 2006.

Reebok's board recommended the deal and approval by the company's shareholders appeared likely, Hainer said.

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 gain in second-quarter net profit and improved sales.

The company earned euro67 million (US$81.7 million) in the quarter ended June 30, up from euro45 million a year earlier. Sales rose to euro1.52 billion (US$1.85 billion) from euro1.4 billion.

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