Nike (NKE: Charts, News, Offers), the world’s largest shoe company, has been reported to be reviewing a possible acquisition of athletic apparel and footwear retailer Under Armour (UA: Charts, News, Offers). Nike, which also produces athletic apparel and accessories, currently has $4.5 billion in cash and $663 million in debt, while Under Armour currently has an enterprise value of $3.6 billion. Under Armour shares have been trading at a market premium, at 22.8 times EBITDA with a trailing P/E of 52.3. However, the temporary dent the August crash made in its shares – which dropped to $52 briefly on August 19 – has been largely erased by an impressive rebound which brought its shares back to the mid $70s in less than a month. This means the market isn’t about to give up on Under Armour, which is estimated to grow its EPS at 34.3% to $1.80 in 2011, and 25.6% and 28.3% in the following two years. However, analysts believe that the company, whose majority (93.8%) of 2010 revenue came from North America, could benefit from the global exposure that Nike could bring.
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Nike defied bears last quarter by trouncing all earnings expectations, and shares have also since rallied and survived the August crash. However, lingering doubts remain regarding Nike’s dominant position, growth potential and market saturation. An acquisition of a fresh name like Under Armour, which is already available in 20,000 retail locations, would boost its position considerably through horizontal integration. A takeover would benefit Nike in both directions, by increasing its North American presence and also its foreign one, through the introduction of Under Armour products to previously untouched markets. So far in 2011, Nike has earned 36.3% of its revenue from North America, 18.3% from Western Europe, 4.9% from Central and Eastern Europe, 9.9% from China, 3.7% from Japan, 13.1% from Emerging Markets and the rest from other businesses and global brand divisions. Of these areas, emerging markets sales has increased 24% throughout the year, while Chinese sales have risen 18%. Two-thirds of sales came from shoes, 30% from athletic wear and the rest from sports accessories and equipment. Sales in Western Europe and Japan respectively dropped 2% and 13%. Nike’s trailing P/E of 19.9 is more reasonably valued than Under Armour’s, and the company is expected to grow earnings by 10% in 2012 and 16.1% and 13.5% in the following two years – far less than Under Armour’s explosive growth and a mark of Nike’s maturity.
An acquisition of Under Armour would create new synergies which would save Nike capital by combining manufacturing facilities. In addition, Under Armour would complement Nike’s current line of subsidiaries, which include Converse, Hurley, Umbro and Cole Haan. It has been reported that Nike may offer $100 per share for Under Armour, an acquisition premium of 27%. However, Nike shareholders might wonder if the company might get a better deal down the road. After all, with such a high P/E any negative volatility is likely to bring the price down considerably, saving Nike hundreds of millions. It may be prudent for the company to wait on a better price before it pays such a high premium. In addition, Under Armour CEO Kevin Plank owns over 24% of outstanding voting shares, and his brother owns 5%. Based on Plank’s past comments and future vision for the company, it seems unlikely that he would cash out and sell his company to Nike, even at $100 per share. Under Armour also recently announced that it would double the size of its Baltimore headquarters, which suggests that the company is actually gunning for Nike, not preparing to be acquired by them. Either way, Under Armour is still a fast-moving growth stock which has legs to run, and can even sprout wings if it successfully brings it business to emerging markets.
Other News About Nike
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Are the Nike rumors true, or impossible?
Nike unveils its Back to Future shoes.
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ARM might finally pin Intel with its next generation of products.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
