PPR Group, the large French retail and luxury conglomerate, has confirmed its intention to launch a full bid for Puma valuing the company at about €5.27 billion, after its acquisition of a 27.1 percent stake and blocking minority belonging to Mayfair, a holding company for the German Herz family. The initiative is wholeheartedly supported by Puma’s supervisory board and by its management, which would gladly make use of PPR’s resources and expertise.
If consummated, the PPR-Puma deal would, in our opinion, accelerate the expansion of a new emerging segment of the now mature sporting goods market that we like to call “luxury sports.” Taking the best from fashion and function and symbolized by Puma’s “Black Station” offerings, it is a range of unique items that can appeal to a rich and sophisticated clientele that looks for maximum creativity allied with comfort and performance – the kinds of people who shop at Gucci stores around the world and wear sneakers from time to time.
For Puma, which has been in the forefront of a trend toward a growing convergence between sports and fashion, PPR’s move is coming at an interesting time in its development where it is looking for new avenues for growth through direct retailing, the acquisition of licensees and the introduction of new categories. It also comes at a time where many other sports brands have jumped on the lucrative sports lifestyle bandwagon. For PPR, the investment in Puma comes after the disposal of many loss-making and peripheral assets, representing a diversification into a domain in which it doesn’t have to compete directly with its arch-rival, the LVMH luxury goods group of Bernard Arnault.
PPR owns several leading specialty retail companies as well as Gucci Group, comprising such luxury brands as Gucci, Bottega Veneta, Yves Saint Laurent, Balenciaga, Boucheron and Sergio Rossi. Another brand belonging to Gucci Group is Alexander McQueen, named after one of several fashion designers who have developed a fashionable range of sneakers for Puma. In another example of the synergies between sports and luxury wear, Gucci Group also owns the brand of Stella McCartney, the designer who develops extensive ranges of high-end women’s sportswear for Adidas.
The Puma stake owned by Mayfair mechanically increased from 25.27 percent to 27.1 percent as Puma announced, after the close of business last Thursday night, that it was cancelling its own treasury shares in the company, representing about 7.4 percent of Puma’s capital. The Mayfair package was essentially held by Günter Herz and his sister Daniela, the very wealthy heirs to the family that owned Tchibo, a German coffee and retail conglomerate. They stepped into Puma in May 2005 and enlarged their package to acquire a blocking minority of more than 25 percent in September 2005. The siblings are making a huge capital gain considering that they spent an estimated €800 million two years ago for one-fourth of the company.
The first rumors about PPR’s move began to spread last Thursday, at the start of a 4-day Easter holiday weekend in Germany and other parts of Europe, leading Puma’s shares to recover by 10.3 percent to €315, the biggest daily increase since last May, without reaching a 52-week high of €337.82. PPR confirmed the deal this morning, on the eve of Puma’s previously scheduled annual meeting tomorrow, with Puma adding that its supervisory board supported its bid.
PPR and Puma said that the offered price of €330 a share has been judged as fair by Lehman Brothers as it amounts to 12.2 times Puma’s EBITDA for 2006, or 13.4 times its EBIT for the same year. Jochen Zeitz, Puma’s chief executive, stressed that these multiples were higher than those applied to other recent transactions in the sporting goods business – probably hinting at Reebok’s acquisition by Adidas.
Several analysts felt that PPR’s offer was too low and that shareholders who accepted it would be missing out on the upside potential of the shares. One analyst, who said his employer owned 1.3 percent of Puma, argued that it was unfair to value the company on the basis of its 2006 EBITDA, since it had been negatively affected by high investments on the 2006 Football World Cup. He said that the offer should reach €400 per share before his client would consider selling.
At €330 per share, excluding a proposed dividend of €2.5 per share for 2006, the price paid to the Herz family and now offered to other shareholders represents a premium of 24 percent on Puma’s average share price during the month that preceded PPR’s Apr. 3 deal for the acquisition of their shareholding. The negotiated price was also 18.1 percent higher than its average over the previous three months.
In two presentations to analysts today, François-Henri Pinault, PPR’s chairman and chief executive, repeatedly stated that his offer was “firm and definitive.” He said he was not overly concerned about any potential counter-offers, and said he would gladly hold on to a minority stake in Puma if PPR could not convince other shareholders to surrender their shares, considering that PPR is expected to hold three seats on Puma’s 6-member supervisory board anyhow, replacing the current three representatives of Mayfair after the European Commission approved the deal. The issue of PPR’s representation on Puma’s supervisory board will be discussed at the annual meeting tomorrow.
Puma’s shares stood this morning above the €330 price offered by PPR. They closed the day at €343.93, up by a further 9.4 percent, after 2.5 million of the 15.96 million new shares changed hands. Some investors appeared to be bracing themselves for an improvement of PPR’s offer, which may or may not come after a possible competing bid at a higher level. Still, part of the increase could be attributed to the cancellation of 1,270,000 treasury shares, announced last Thursday night before the Easter holidays, which reduced the number of outstanding shares by 7.4 percent to 15,963,714. PPR’s shares were up by about 3.2 percent today, but they had already started to go up on Friday, which was not a holiday in France. PPR says its takeover would be entirely financed through loans, but Standard & Poor’s said the outlay would be so big that it may then reduce PPR from an investment grade to a junk rating.
Puma is welcoming PPR as a strategic investor mainly because of its strong know-how in design, sourcing and merchandising. Zeitz indicated today that PPR could help to develop Puma more than the financial partners that have successively backed the company over the last years, cashing out each time with a capital gain. Before Mayfair and PPR, that role was played by the Swedish Proventus group and by an American film and entertainment company, Monarchy Regency, which actually did a lot to make the Puma brand more “desirable.”
More on the synergies with PPR should be learnt at a conference on Thursday (we plan to cover that in Shoe Intelligence), but Zeitz emphasized today that the synergies would all be qualitative rather than quantitative. PPR would not seek reimbursement of the acquisition price through cost savings, and Puma would retain its staff and independence, like other components of the PPR Group, whose origins are in wood and furniture. No changes in management are planned. Puma’s offices in Herzogenaurach, Boston and Hong-Kong should all remain in place, as guaranteed in a letter of intent that Puma has received from PPR.
Another interesting aspect in Zeitz’ view is that PPR could share some of its know-how in managing a multi-brand conglomerate, as it has done over the last years at Gucci Group. Puma already owns Tretorn but Zeitz has made it clear that, as part of its current development phase, the company would be eyeing further acquisitions. Pinault himself hinted at a possible takeover in one of his presentations today.
There was an unconfirmed rumor recently that Puma may be interested in acquiring Umbro in order to obtain a higher market share in the very important football market. Zeitz has so far indicated that external growth could contribute only about ten percentage points to the €4 billion goal that he has set for his company in 2010, but it would not be surprising if he and PPR would now look for bigger prey in the sporting goods sector. While Adidas still has to prove that it can integrate Reebok, Nike is the only company that has done a good job with some of the brands that it has acquired, such as Converse or Cole Haan.
In one of his presentations, Pinault was particularly upbeat about the potential synergies in terms of retailing: he said that PPR could substantially help Puma to speed up the opening of new stores to display its new product categories, and while cautioning that he was not cosidering setting up any “PumaTowns,” Zeitz indicated that Puma may well want to push its direct sales above the current level of 14.5 percent of revenues. Furthermore, PPR had more expertise in the field of sales over the internet and in other interesting segments such as accessories, from eyewear to perfume and small leathergoods. The new partner could help increase the percentage of Puma sales generated by clothing, which stands at 34 percent, and accessories, currently at 6 percent of sales, against 60 percent for footwear.
Incidentally, last September PPR acquired The Sportsman’s Guide, an American specialist in mail order and on-line sales of sports and leisure products. The company owns The Golf Warehouse, which concentrates on sales of golf equipment. In fact, PPR has already been active in sports retailing over the last years through a large sports superstore in Paris, called Citadium, and through Made in Sport, a hybrid French retailer of fan products. However, they both belonged to the Printemps group, which PPR spun off last year to the Italian Borletti group, which owns La Rinascente.
PPR assured its own investors that Puma’s acquisition should be accretive in terms of earnings per share from the first year. Standing at 15.5 percent in 2006, Puma’s EBITA margin was much higher than the 7.1 percent average at PPR, and just below the 15.8 percent EBITA margins of PPR’s luxury activities. On a pro forma consolidated basis, the combination of the two companies would form a group whose total revenues would have reached about €20.3 billion in 2006, with Puma representing 13 percent of the total.
Further details about PPR’s bid will come out tomorrow or shortly afterwards. PPR expects clearance of the deal by the European authorities to come through toward the beginning of June, although this might happen earlier. The whole procedure should be closed by early July - unless there is a counterbid.
Pinault said that he got to know Zeitz in early 2004, when a French headhunter put the Puma chief forward as a leading executive to hire for the Gucci Group. Although Zeitz declined, the two men kept in touch and Zeitz, whose contract with Puma runs until 2009, ended up introducing Pinault to Mayfair last month.
On an anecdotal note, Zeitz said that he had never held talks with Nike for the takeover of Puma. This was one of the many rumors that have been circulating about the fate of the company over the last years, in the context of the industry’s ongoing concentration.
In the meantime, Puma has taken another concrete step toward its international development by announcing the end of its license agreement with E-Land in South Korea and its replacement with a full-fledged subsidiary from the beginning of 2008. The agreement was scheduled to run out at the end of 2007 and the two parties have failed to come to an agreement for the continuation of the collaboration thereafter. Over the last years Puma has been most active in taking over control of its operations in several Asian countries.
