Adidas acquires Under Armour: a new era in Sporting Goods Vítor Hugo Silva Nunes Student Number: 152416010 Dissertation written under the supervision of Professor António Borges de Assunção Dissertation submitted in partial fulfilment of requirements for the MSc in Finance, at the Universidade Católica Portuguesa, June 2018. Adidas acquires Under Armour: a new era in Sporting Goods Abstract What would happen to the Sporting Goods Industry if the largest sportswear manufacturer in Europe and second largest in the world decided to buy one of the fastest growing companies, with a very strong presence in the USA? The aim for this dissertation is to correctly evaluate the pricing for both Adidas AG and Under Armour, Inc., in a deal that would strengthen the German company. The objective is simple: dominate the largest market in the world, North America, and dethrone the giant Nike. This dissertation will center on valuing both companies, with a focus on the combined synergies resulting from the merger. For that, I computed three valuation methods: Discounted Cash- Flow (DCF), Adjusted Present Value (APV), and Relative Valuation (Multiples). I will also provide an industry and company overview, in order to extract the main conclusions, and its impact on a worldwide level. In the end, my recommendation is that Adidas acquires Under Armour with a premium of 34% over each share class, as follows: Class A valued at €17,97, Class C valued at €15,62 and Class B, not publicly traded, at €39,12. This will result in a total value of €8.139 million, €2.067 million over the Market Capitalization. Keywords: Sporting Goods Industry, sportswear manufacturer, Adidas AG, Under Armour Inc., Nike, North America, synergies, dominate. 1 Adidas acquires Under Armour: a new era in Sporting Goods Sumário Executivo O que aconteceria na indústria de artigos desportivos se a maior fabricante da Europa e segunda maior do mundo decidisse comprar uma das empresas com maior crescimento, com uma presença muito forte nos EUA? O objetivo desta dissertação é avaliar corretamente o preço da Adidas AG e da Under Armour, Inc., num acordo que tornaria a empresa alemã mais forte. O objetive é simples: dominar o maior mercado do mundo, a América do Norte, e destronar a gigante Nike. Esta dissertação irá centrar-se na avaliação de ambas as empresas, com foco nas sinergias combinadas resultantes da fusão. Para isso, calculei três métodos de avaliação: Discounted Cash-Flow (DCF), Adjusted Present Value (APV), and Relative Valuation (Multiples). Realizei ainda uma análise geral da indústria e das empresas, de modo a extrair as principais conclusões e o seu impacto a nível mundial. No final, a minha recomendação é que a Adidas adquira a Under Armour com um prémio de 34% sobre cada classe de ações, da seguinte forma: Classe A avaliada em €17,97, Classe C avaliada em €15,62 e Classe B, não negociada no mercado de ações, a €39,12. O resultado é uma avaliação de €8.139 milhões, €2.067 milhões acima da Capitalização de Mercado. Palavras-chave: Indústria de artigos desportivos, Adidas AG, Under Armour Inc., Nike, América do Norte, sinergias, dominar. 2 Adidas acquires Under Armour: a new era in Sporting Goods Acknowledgements This thesis represents a very important part of my life, as I have previously worked at Adidas and experienced all the company has to offer. I have lived the culture of commitment, growth and responsibility, and can honestly say it is one of the best workplace I can think of. I want to thank all of my colleagues for the support provided, knowing this dissertation is partly theirs. A special thank you to my advisor, for all the help and supervision. His guidance was fundamental for the success of this dissertation. I would also like to thank my family, for the unconditional support provided throughout the years, and in special to my parents who made it possible for me experience all that I have lived so far. There was no greater lesson of hard work, perseverance and love I could have got growing up. Finally, to my girlfriend, for always being there for me, in good and bad times, knowing this thesis was dear to me, supporting me in every moment. 3 Adidas acquires Under Armour: a new era in Sporting Goods Table of Contents 1. Introduction ...................................................................................................... 10 2. Literature Review ............................................................................................. 11 2.1 M&A Overview ................................................................................................ 11 2.1.1 M&A issues ...................................................................................................... 12 2.1.2 Synergies: Value creation or destruction? ......................................................... 13 2.1.3 Payment Methods ............................................................................................. 14 2.2 Valuation Methods .................................................................................................. 15 2.2.1 DCF ................................................................................................................... 15 2.2.1.1 Free Cash-Flow to the Firm (FCFF) ............................................................ 16 2.2.1.1.1 WACC .................................................................................................... 16 2.2.1.1.2 Required Return on Equity ..................................................................... 17 2.2.1.1.3 Cost of Debt ............................................................................................ 17 2.2.1.1.4 Growth Rate ............................................................................................ 18 2.2.1.1.5 Terminal Value (TV) .............................................................................. 18 2.2.1.2 APV – Adjusted Present Value .................................................................... 19 2.2.1.3 Multiples – Relative Valuation .................................................................... 20 2.3 Cross Border Valuation........................................................................................... 20 3. Industry Overview ............................................................................................ 22 3.1 PEST Analysis ........................................................................................................ 23 3.2 Porter 5 Forces .................................................................................................. 24 3.3 Global Demand ....................................................................................................... 25 3.4 Industry Trends ....................................................................................................... 28 4. Company Overview .......................................................................................... 30 4.1 Adidas AG ........................................................................................................ 30 4.2 Under Armour, Inc. ................................................................................................. 33 5. Adidas Valuation .............................................................................................. 37 4 Adidas acquires Under Armour: a new era in Sporting Goods 5.1 Consolidated Income Statement ....................................................................... 37 5.1.1 Revenue ............................................................................................................ 37 5.1.2 Cost of Goods sold / Gross Margin .................................................................. 37 5.1.3 Operating Expenses .......................................................................................... 37 5.1.4 Net Interest Expense ......................................................................................... 38 5.1.5 Income Taxes – Tax Rate ................................................................................. 38 5.2 Consolidated Balance Sheet ............................................................................. 39 5.2.1 Current Assets................................................................................................... 39 5.2.2 Current Liabilities ............................................................................................. 39 5.3 Capital Expenditures – CAPEX ....................................................................... 40 5.4 Discounted Cash Flow – DCF .......................................................................... 40 5.4.1 Cost of Equity ................................................................................................... 40 5.4.2 Growth Rate ...................................................................................................... 40 5.4.3 Capital Structure ............................................................................................... 40 5.4.4 Weighted Average Cost of Capital - WACC .................................................... 41 5.5 Adjusted Present Value – APV ........................................................................ 41 5.6 Multiples Valuation .......................................................................................... 43 5.7 Conclusion ........................................................................................................ 44 6. Under Armour Valuation .................................................................................