Adidas/Reebok Merger

October 8, 2009

Collin Shaw Kelly Truesdale Michael Rockette Benedikte Schmidt SaravananSadaiyappan

Key Takeaways
What value does Reebok add to Adidas? How should Adidas value Reebok and with what synergies? Has the merger been a success or failure?

Agenda
Adidas & Reebok Background Acquisition Background Industry Overview SWOT Analysis Valuation Model Synergies Integration Plan Post Integration Conclusions

Adidas
Founded in 1926 World leader in soccer shoes #2 behind Nike worldwide - #4 in the US Three acquisitions before Reebok: Company Sports Inc in 1993 Salomon in 1997 Arc'Teryxin 2002 Culture of control, engineering, and production

Reebok
Founded in 1895 First athletic shoe for woman #2 in US - #4 in Europe Strong sales growth from 2002-2004 Unique portfolio of long term league licenses Creative marketing-driven culture

Industry Overview
One of the most competitive industries. Over 75% of the industry controlled by branded items. Large players supplier power and access to shelf space. Small players anticipating a fashion trend. Private label a threat.

US Footwear Market

Expected Trend
Expected growth rate ~9% Change from Supply Push to Demand Pull model. Blurring line between sport wear and active wear.
Demand for athleisure shoes.

Acquisition Background
Goal: increase share in the U.S. market + better compete with Nike Stock prices improved the day of announcement Reebok sales down in fourth quarter of 2005 Deal closed on January 2006 Price: $3.52 billion

SWOT Analysis
Strengths
Adidas is strong in Europe, Reebok is strong in US, & Asia

Weaknesses
Many overlapping products Two HQs that will be hard to integrate Two very strong, distinct corporate cultures

Complementary licenses and contracts

Reduced costs for retailers Reebok is extremely strong in Womens wear

SWOT Analysis
Opportunities
Leverage combined R&D strengths & budgets Bring Reeboks womens wear to Europe Reduce costs to retailers by larger distribution networks Ability for better reaction to global trends

Threats
Competition between brands employees Cannibalization of sales Realization of revenue growth synergies Adidas may treat Reebok as a second tier brand

Valuation Model Assumptions

Reebok WACC Market Risk Premium Multiplied by: Reebok Levered Beta Adjusted Market Risk Premium Add: Risk-Free Rate of Return Cost of Equity Multiplied by: Reebok Equity % Cost of Equity Portion 5.00% 1.371 6.90% 4.30% 11.20% 83.30% 9.30%

Pre-Tax Cost of Debt Effective Tax Rate Cost of Debt Multiplied by: Reebok Debt % Cost of Debt Portion WACC

7.30% 30.90% 5.00% 16.70% 0.80% 10.10%

Valuation Model
Total Revenues Annual Growth EBITDA Annual Growth Margin Less: Depreciation Margin EBIT Annual Growth Margin Less: Income Taxes Effective Tax Rate Unlevered Net Income Plus: Depreciation Less: Capital Expenditures Margin Less: Increase in NWC Margin Free Cash to Equity Annual Growth 2000 2865.24 216.37 7.6% 46.20 1.6% 170.17 5.9% 49.00 36.1% 121.17 46.20 -29.16 -1.0% 33.39 1.2% 171.60 2001 2992.88 4.5% 221.06 2.2% 7.4% 36.62 1.2% 184.44 8.4% 6.2% 48.30 31.0% 136.14 36.62 -27.40 -0.9% 42.48 1.4% 187.84 9.5% 2002 3127.87 4.5% 247.48 12.0% 7.9% 32.03 1.0% 215.45 16.8% 6.9% 60.57 31.0% 154.88 32.03 -27.61 -0.9% 59.51 1.9% 218.82 16.5% 2003 3485.32 11.4% 288.00 16.4% 8.3% 35.64 1.0% 252.36 17.1% 7.2% 72.12 30.8% 180.25 35.64 -44.48 -1.3% -70.58 -2.0% 100.83 -53.9% 2004 3785.28 8.6% 333.19 15.7% 8.8% 38.85 1.0% 294.35 16.6% 7.8% 68.49 25.8% 225.86 38.85 -55.46 -1.5% -24.61 -0.7% 184.63 83.1% 2005E 4057.82 7.2% 323.94 -2.8% 8.0% 47.95 1.2% 275.99 -6.2% 6.8% 85.28 30.9% 190.71 47.95 -45.10 -1.1% 14.71 0.4% 208.27 12.8% 2006E 4349.99 7.2% 350.74 8.3% 8.1% 51.41 1.2% 299.33 8.5% 6.9% 92.49 30.9% 206.84 51.41 -48.35 -1.1% 15.77 0.4% 225.66 8.4% 2007E 4663.19 7.2% 379.75 8.3% 8.1% 55.11 1.2% 324.64 8.5% 7.0% 100.31 30.9% 224.33 55.11 -51.83 -1.1% 16.90 0.4% 244.51 8.4% 2008E 4998.94 7.2% 411.16 8.3% 8.2% 59.08 1.2% 352.09 8.5% 7.0% 108.79 30.9% 243.29 59.08 -55.56 -1.1% 18.12 0.4% 264.93 8.4% 2009E 5358.86 7.2% 445.17 8.3% 8.3% 63.33 1.2% 381.84 8.5% 7.1% 117.99 30.9% 263.85 63.33 -59.56 -1.1% 19.43 0.4% 287.05 8.3% 2010E 5744.70 7.2% 482.00 8.3% 8.4% 67.89 1.2% 414.11 8.4% 7.2% 127.96 30.9% 286.15 67.89 -63.85 -1.1% 20.82 0.4% 311.01 8.3%

189.1641266 186.1611281 183.2043614 180.2931545 177.4268439 Assumptions WACC Revenue Growth Tax Rate Terminal EV/EBITDA Margins EBITDA Depreciation CAPEX NWC Initial 8.0% 1.2% -1.1% 0.4% 10.1% 7.2% 30.9% 7.50x Growth 1.0% 0.0% 0.0% 0.0% Equity Value Calculation PV of 5-Year Estimates PV of Terminal Value Enterprise Value Less: Net Debt Equity Value Shares Outstanding Implied Value Per Share Premium to Market Price 916.25 2234.44 3150.69 41.30 3191.99 59.21 53.91 26.8%

Implied Perpetual FCF Growth

1.5%

Synergies
Geographies and Categories
Idea sharing across markets and geographies Capitalize on Reebok's skills and know how to accelerate Adidas position in North America Benefit from Adidas expertise in Europe and Reebok's in Asia

Consumer & Demographics

Ability to identify sport/style trends Better product and category prioritization More products and more price points Continue brand developments into new segments Benefit from Reebok's expertise in Women's segment Capitalize from Reebok's skills in sport lifestyle and leisure

Combine expertise in branded and licensed athletic apparel

Synergies contd
Technology
Enhance profile as technology leader and innovation leader Bigger combined R&D spend More products to capitalize on R&D spending New technology developments and awareness across brands Applications Materials

Licenses, Events and Teams

Transfer of skills and knowhow Management of exclusive agreements Relationship with teams and athletes More active events calendar

Synergies contd
Distribution Channels
Capitalize on Adidas in-depth understanding of specialized sporting goods channel Benefit from Reebok's strong insights into department store and general merchandise channel Selective Channel Diversification Expand on retail initiatives in emerging markets

Operating Efficiencies
Sales, Marketing & Distribution 40% of Synergies Higher efficiency through combined sales and marketing scale Better utilization of available distribution capacity Admin Services & IT 40% of Synergies Simplify overlapping functions Remove Duplicative IT Functions Operations and Sourcing 20% of Synergies Greater economies of scale in global sourcing Improved warehousing facilities

Combined Valuation w/o Synergies

Total Revenues Annual Growth EBITDA Annual Growth Margin Less: Depreciation Margin EBIT Annual Growth Margin Less: Income Taxes Effective Tax Rate Unlevered Net Income Plus: Depreciation Less: Capital Expenditures Margin Less: Increase in NWC Margin Free Cash to Equity Annual Growth Assumptions WACC Revenue Growth Tax Rate Terminal EV/EBITDA 2005E 12388.46 5.0% 1191.14 9.6% 63.55 0.5% 1127.59 9.1% 398.04 35.3% 729.55 63.55 -129.55 -1.0% -11.21 -0.1% 652.34 2006E 13097.16 5.0% 1259.28 5.7% 9.6% 67.18 0.5% 1192.10 5.7% 9.1% 420.81 35.3% 771.29 67.18 -136.96 -1.0% -11.85 -0.1% 689.66 5.7% 594.1175943 2007E 2008E 13847.71 14642.69 5.0% 5.0% 1331.45 1407.88 5.7% 5.7% 9.6% 9.6% 71.03 75.11 0.5% 0.5% 1260.41 1332.77 5.7% 5.7% 9.1% 9.1% 444.93 470.47 35.3% 35.3% 815.49 862.30 71.03 75.11 -144.81 -153.13 -1.0% -1.0% -12.53 -13.25 -0.1% -0.1% 729.18 771.04 5.7% 5.7% 572.0443788 550.8437832 Equity Value Calculation PV of 5-Year Estimates PV of Terminal Value Enterprise Value Less: Net Debt Equity Value Shares Outstanding Implied Value Per Share Premium to Market Price Implied Perpetual FCF Growth 2009E 15484.80 5.0% 1488.85 5.8% 9.6% 79.43 0.5% 1409.42 5.8% 9.1% 497.52 35.3% 911.89 79.43 -161.93 -1.0% -14.01 -0.1% 815.39 5.8% 530.4798466 2010E 16376.94 5.0% 1574.63 5.8% 9.6% 84.01 0.5% 1490.62 5.8% 9.1% 526.19 35.3% 964.43 84.01 -171.26 -1.0% -14.81 -0.1% 862.36 5.8% 510.9181283 2758.40 7893.25 10651.66 -922.73 9728.93 183.44 53.04 16.9% 3.0%

9.8% 5.0% 35.3% 8.00x

Combined Valuation w/ Synergies

Total Revenues Annual Growth EBITDA Annual Growth Margin Less: Depreciation Margin EBIT Annual Growth Margin Less: Income Taxes Effective Tax Rate Unlevered Net Income Plus: Depreciation Less: Capital Expenditures Margin Less: Increase in NWC Margin Free Cash to Equity Annual Growth 2005E 12398.46 5.0% 1192.10 9.6% 63.55 0.5% 1128.55 9.1% 398.38 35.3% 730.17 63.55 -129.55 -1.0% -11.21 -0.1% 652.96 2006E 13147.16 5.0% 1264.09 6.0% 9.6% 67.39 0.5% 1196.70 6.0% 9.1% 422.44 35.3% 774.27 67.39 -137.38 -1.0% -11.88 -0.1% 692.39 6.0% 594.6841559 2007E 2008E 13947.71 14892.69 5.0% 5.0% 1353.56 1516.92 7.1% 12.1% 9.7% 10.2% 71.49 76.33 0.5% 0.5% 1282.07 1440.59 7.1% 12.4% 9.2% 9.7% 452.57 508.53 35.3% 35.3% 829.50 932.06 71.49 76.33 -145.74 -155.61 -1.0% -1.0% -12.61 -13.46 -0.1% -0.1% 742.64 839.32 7.3% 13.0% 574.3122366 561.0123429 Equity Value Calculation PV of 5-Year Estimates PV of Terminal Value Enterprise Value Less: Net Debt Equity Value Shares Outstanding Implied Value Per Share Premium to Market Price Implied Perpetual FCF Growth 2009E 15984.80 5.0% 1686.92 11.2% 10.6% 81.93 0.5% 1604.99 11.4% 10.0% 566.56 35.3% 1038.43 81.93 -167.03 -1.0% -14.45 -0.1% 938.89 11.9% 577.4526079 2010E 16876.94 5.0% 1772.70 5.1% 10.5% 86.50 0.5% 1686.20 5.1% 10.0% 595.23 35.3% 1090.97 86.50 -176.35 -1.0% -15.25 -0.1% 985.87 5.0% 588.3039321 2895.77 8886.16 11781.92 -922.73 10859.19 183.44 59.20 16.9% 2.8%

Assumptions WACC Revenue Growth Tax Rate Terminal EV/EBITDA

9.8% 5.0% 35.3% 8.00x

Actual Acquisition Statistics

Adidas paid $3.527 billion for Reebok Adidas paid $59.00 per share for all of Reeboks shares
Adidas paid a 34.2% premium which was still accretive to the P/E ratio

Based on our model Adidas could have paid between $53.91 & $66.85

Integration Issues
Management /Structure Changes
New Brand CEOs and Reebok CEO to Advisor Head Quarters to Remain Integration planning team comprised of employees from both

Employee Care and Retention

Mixed employee benefits HR resources to all employees

Distribution Centers and Back Operations

Combined many Distribution Centers and Back Operations
Reebok switched from a Bulk Pre-Order system to Pay-as-You-go Consolidate Suppliers

Integration Issues
Research & Development
Combined to share both costs and technology Reduced employees and raised efficiencies

Brand Imaging to Reebok as Premium Shoe

New Pay-as-You-go system reduces retailer sales on Reebok Customize shoes through a website Increase Prices Reduce manufacturing of Classic Styles

Geographies and Product Lines

Increased international presence and product lines (i.e. shoes & apparel)

Licenses, Events and Teams

Very similar strategy for both brands but Adidas gets Reebok NBA contract

Post-Integration Results
Management/Structure Changes
Successful through speed, efficiency and cooperation

Employee Care
Handled as well as could be expected

Distribution Centers
Mixed Emotions in short term, spent money to become efficient Taking longer than anticipated

R&D
Successful at reaching companies goals on new products & efficiency

Post-Integration Results
Brand Imaging
Continue to face uphill battle and challenge Success is still possible in long term

Geographies and Product Lines

Expansion into new countries has partially offset loses in mature markets New product lines and strategies have produced mixed results

Licenses, Events and Teams

With little change no success or failure has been noticed

Did the merger work?

Our focus this year will be on getting Reebok back onto a growth track. It's going to take time, but we're moving in the right direction.
- Herbert Hainer, Adidas Chief Executive in 2007

Gross margins dropped 3.6% in 2007. Sales and order back log of Reebok declined. The whole group still made money.

What went wrong?

Misperception among Retail Partners about the future of Reeboks brand strategy Questions about the German American Corporate Culture. Underestimation of competition from Nike.

Whats happening now?

In 2008, Adidas put in an extra $50 million to bring back Reebok on track. Started realizing some of the synergies in late 2008 but on a lower scale than estimated.

Q&A