France's PPR has taken a 27% stake in the German sports powerhouse. The aim: a friendly takeover
John Horan vividly remembers the time, just seven years ago, when German sportswear maker Puma, was "pretty much a dead brand." It was during the dot-com boom and Horan, the publisher of industry newsletter Sporting Goods Intelligence, was running a conference for financial analysts. Presenting in one room was MVP.com, a hot online sporting-goods startup backed by the likes of John Elway, Wayne Gretzky, and Michael Jordan. "The analysts were hanging from the rafters," Horan recalls.
Right next door, Jochen Zeitz, then the newly appointed chief executive officer of Puma, was presenting his strategic plan to a nearly empty hall. Horan felt so bad for the guy that he sat in the audience to provide company. How things have changed since then. MVP.com was gone a year later, a victim of the dot-com bust. And Puma? Its market capitalization has increased more than tenfold, as Zeitz's turnaround plan bore fruit.
On Apr. 10 the extent of Puma's comeback became clear as French retailing and luxury giant PPR (formerly known as Pinault Printemps Redoute) snapped up 27% of the company for €1.4 billion ($1.88 billion), valuing the whole at more than $7.1 billion. PPR, led by CEO François-Henri Pinault, intends to take controlling interest of Puma later—perhaps as soon as this summer—adding the sportswear maker to a stable of brands that includes Gucci, Yves Saint Laurent, FNAC, and Redcats.
On the Way to Iconic Status
The friendly takeover, supported by the Puma board, carries a 24% price premium over Puma's average share price during the past month. Both sides talk up its potential to create synergies and to boost Puma beyond the $3.2 billion in revenues it booked last year. "I am confident that PPR is the ideal partner to support Puma in its current development phase to become a global iconic sport-lifestyle company," Pinault said in a statement.
That could be true, analysts say, at least from an industrial standpoint. "This is a good deal for the Puma company," says analyst Uwe Weinreich of HypoVereinsbank in Frankfurt, who figures PPR can help Puma in its push to move beyond sportswear and into more of a lifestyle brand. "PPR's retail experience and reach is excellent," Weinreich says. While neither he nor other analysts expect PPR to turn Puma into a luxury purveyor, nudging it upscale could help differentiate it from the more sports-oriented Nike (NKE) and Adidas.
On the other hand, Weinreich isn't happy with PPR's "fixed and final" price of €330 ($443) per share. "It's not enough for the shareholders" says Weinreich, who thinks the purchase price ought really to be €400 euros per share. He bases this claim on Puma's current growth potential, projected revenue synergies between Puma and PPR of up to 4% of joint sales, cost synergies of up to 2% of the joint operating cost base over the next three years, and the price-earnings ratios of other companies in the sector.
Higher Offer for Remaining Shares?
Weinreich wasn't the only one thinking the price might be low. On Apr. 10, investors bid up Puma shares by more than 9% on the Frankfurt bourse, to €343.70, or about 4% above PPR's price, following a 10% runup last week after word first leaked of PPR's interest (see BusinessWeek.com, 04/06/07, "Puma Jumps on Acquisition Talk"). That implies many investors expect PPR to raise its price—or that a rival bidder could emerge.
PPR already has locked in at €330 per share the 27% of Puma it bought from the company's largest shareholders, billionare siblings Günter and Daniela Herz, who come from the family that founded German clothing and coffee giant Tchibo. But to acquire a controlling interest PPR will have to convince other shareholders to hand over their stakes. Depending on how markets continue to react, that could mean offering more.
Even then, analysts see this as a good deal for PPR. Deutsche Bank said in a research note that "the Puma deal looks cheap, certainly relative to luxury targets," while Natexis Bleichroeder praised PPR's track record in acquisitions. Most doubt that a competing bid from the likes of Nike or Adidas would pass anti-trust muster, while a private equity buyout would fail to deliver any of the retail and distribution benefits from teaming up with PPR.
Retaining Management is Key
What everybody agrees is crucial, though, is that Zeitz must stay on. "He's the key to the deal," says one London equity analyst who requested anonymity. "Without him, you have a problem." Barely 30 when he took charge of Puma, Zeitz "has really created a very design-conscious company, more oriented to lifestyle than to sweat," says newsletter publisher Horan.
While Adidas and Reebok have struggled some lately (see BusinessWeek.com, 03/07/07, "Adidas: Stumbling Over Reebok?"), Puma has managed to gain traction in the U.S., attract young urban customers, and appeal to female shoppers more than Nike has. Under PPR's wing, analysts speculate, the company could continue to move more into lifestyle products. PPR also can help Puma gain more international presence and streamline operations and brand management.
At the same time, PPR has said it aims to maintain Puma as a standalone operation, not merge it into other pieces of the company. Besides, experts are skeptical about the idea of "luxury" sportswear. "There's no obvious distribution channel for that," says Horan. "Maybe they'll try it a ways down the road—and maybe not even using the Puma name."
Sounds promising, but long before any synergies or brand extensions occur, PPR has to nail the deal. This race could get hot.