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Adidas to buy Reebok for $3.8 bln

August 3, 2005

By Ulf Laessing

FRANKFURT (Reuters) – Germany’s sporting goods maker
Adidas-Salomon has agreed to buy U.S. rival Reebok for $3.8
billion, closing the gap on Nike and promising a profit jump by
expanding in the United States and entering new markets.

The world’s second- and third-biggest sports goods
companies said on 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 on 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.

Reebok, based in the Boston suburb of Canton,
Massachussets, brings along 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 Alan 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.

Shares in Adidas 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.

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.

LIFESTYLE VS SPORTS

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.

Adidas, best known for its trademark three-striped running
shoes, has been trying to imitate the success of German rival
Puma, whose trendy sportswear has spread far beyond the gym or
running track.

But some investors were cautious about how successfully
Adidas would integrate Reebok, and questioned the deal’s timing
ahead of next year’s World Cup soccer tournament in Germany, of
which Adidas is a major sponsor.

“I would watch the execution of the integration very
carefully because it won’t be easy to integrate the businesses
– Adidas’s focus is on sport but Reebok’s is on lifestyle,”
said Volker Riehm, fund manager at Activest.

“Apart from that, Adidas is creating a load of work for
itself when the World Cup mega-event is just around the
corner.”
(Additional reporting by Georgina Prodhan and Natalia Matter)




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