Nike is using its huge cash pile to make a sizeable investment in football, justifying the investment with the fact that the sport is the most popular one in the world. Its all-cash offer of 195 pence a share for Umbro International, or £285 million (€410m-$582m), represents a hefty 61 percent premium over the closing price of 120 pence a share on Oct. 17, the last business day before the English company announced that it had received a takeover offer.
Clearly, Nike sees potential to grow Umbro’s business significantly, as it has done with Converse, through its own expertise in brand management and product development, its financial muscle and its sourcing capabilities. Without mentioning a specific sales goal, Nike’s management says it expects "significant" growth for Umbro in the long term through geographical expansion and through a diversification of its product range.
Top executives of Nike and Umbro stressed in conference calls with analysts yesterday that the English company would continue to be run as a stand-alone business under its existing management, based in the UK, and that there would be an optimization of Umbro’s current strategy, rather than a significant review, with an acceleration of its implementation. Umbro has earlier stated that its three main strategic goals are to be at least #3 in on-field football in every market where it operates, to grow its branded business by 10 percent a year, and to develop its range of football-inspired lifestyle products.
Notably, Nike would help Umbro to accelerate its development in certain football markets by transferring some of its own sponsorship contracts over, in the way in which Adidas has already done by taking over Reebok’s contract with the Liverpool football team. While Nike is particularly bullish about the potential of football in certain emerging markets, Umbro is particularly keen on expanding its own presence in such countries as Germany, Italy and Brazil. It is already doing well in China and France, where it has acquired stakes in the local licensees, and in Russia and the USA. Sales on the U.S. market, where Umbro has a special agreement with Dick’s Sporting Goods, rose by 150 percent in the first nine months of this year.
Nike would also be able to finance the acquisition of some of Umbro’s licenses once they expire, backing the English company’s strategy to make investments in some of the six "priority markets" around the world that are expected to account for about 70 percent of the global football market in the near future. Earlier this year, the company acquired major stakes in the Umbro operations of its Chinese and French licensees, and it terminated a license for Germany, Austria and the Benelux countries. In the last financial year, only 37 percent of Umbro’s so-called Total Wholesale Equivalent (TWE) sales were direct, including about £150 million (€217m-$308m) made in the UK. Much like those of Converse in Europe, the rest was based on licenses on which Umbro gets royalties.
The acquisition would help to back up Nike’s claim, which has been contradicted by Adidas so far, that it has become the world’s largest football company. Nike has stated that its sales of football products have reached $1.5 billion a year, while admitting that some of that is represented by football-inspired lifestyle products. Umbro and its licensees had last year aggregate wholesale sales of £409.5 million (€593m-$841m), all more or less related to football, and about half of them were generated by products that can be used on the pitch.
Umbro has reportedly estimated that Adidas controls the global football market, estimated at $2.4-2.5 billion, with a share of 35 percent, followed by Nike at 32 percent, Umbro at 8 percent and Puma at 5 percent. Unconfirmed reports indicated last year that Puma was interested in buying Umbro to help boost its own football business.
Judging from Nike’s statements, it’s possible that Umbro’s product range and marketing positioning will be expanded to include some premium products, matching the strategy that Nike has used in developing its Jordan brand in basketball. For the moment, Nike is generally positioned generally as a premium brand in the football market, while Umbro is a more affordable brand with a strong 70-year heritage in football that makes it quite authentic and unique. In any case Nike wants to contribute to improve the quality of Umbro’s product line and to build up the Umbro brand further to make the company less dependent on the the relatively volatile licensed replica business.
Licensed products currently represent between 25 and 33 percent of Umbro’s sales in terms of TWE turnover, depending on tournaments and the successes of England’s national football team. That proportion should continue to decline, although Umbro and Nike have both restated a commitment to continue to sponsor England’s Football Association until Umbro’s 20-year-old contract for the national team expires in 2014. A spokesman said that the FA was waiving a clause in its contract with Umbro that would have obliged the parties to renegotiate the contract in case of a change of ownership.
Projected to close in the Spring of 2008, the proposed takeover should not hit any anti-trust hurdles even in the UK, the world’s largest football market, where Umbro ranks as #3. It doesn't cover the Umbro business in Japan, where the rights to the brand were sold to Descente many years ago.
Doughty Hanson, the British investment fund that floated Umbro on the London Stock Exchange three years ago, is expected to approve the deal. Umbro’s board of directors is unanimously recommending that company shareholders accept Nike’s takeover offer, but it’s too early to predict the attitude of Sports Direct International and JJB Sports, two major clients of Umbro in the UK that have acquired a combined 25 percent stake in Umbro in recent weeks, starting around Sept. 10.
According to an Umbro spokesman, Nike officials approached Umbro and its shareholders about three-four weeks ago. Evidently sniffing a possible deal, Sports Direct and then JJB acquired equity stakes in the British football company. In acquiring a stake of 10.12 percent in Umbro earlier this month, JJB, which makes about 13 percent of its revenues from replica jerseys, said it intended to safeguard its position in the England replica market. Chris Ronnie, who became chief executive of JJB earlier this year, worked previously at Umbro as well as at Sports Direct.
As for Mike Ashley, the maverick investor who controls Sports Direct, he is known for acquiring large stakes in sports goods companies that he will subsequently re-sell at a premium. Sports Direct already owned a small share in Umbro, which was raised to 4.97 percent in mid-September and then to 15.04 percent on Oct. 16. Barclays has also pitched in recently by acquiring nearly 8 percent of Umbro. Anyhow Nike officials said they would not interfere with Umbro’s close relationship with Sports World or with Dick’s. Umbro was planning to have football areas in 50 JJB Sports stores and 180 Sports World stores by the end of this year.
It’s not clear whether Sports Direct and JJB will want to bloc the sale or tender their shares to Nike, but if they do so they will both end up with sizeable capital gains. It’s also possible that Sports Direct or another company, possibly including Adidas, will offer more than Nike, but this seems unlikely at this stage.
Umbro’s share price rose by almost 15 percent after Umbro announced last week that it had been approached for a possible takeover offer, but it had already started to move up through the previous investments in the stock. It reached a record of 188.7 pence yesterday after averaging 146.5 pence in August, 119.4 pence in September and 127.3 pence so far in October.
The multiples offered by Nike appear to strike a balance between the relatively low results of Umbro for the first half of this year, where there was no major football tournament, and those of the past year, when they were boosted by the FIFA World Cup. In the latest financial year, Umbro’s revenues increased by 21.6 percent to £149.5 million (€217m-$308m), but Total Wholesale Equivalent (TWE) sales, which include those of its licensees, improved by 16.3 percent to £409.4 million (€584.8m-$766.7m). Operating profit rose by 11.7 percent to £27.4 million (€39.7m-$56.4m), and pre-tax profit grew by 15.7 percent to £26.6 million (€39.2m-$51.4m).
For the first half of this year, which ended on July 1, Umbro reported a pre-tax profit of £9,801,000 (€14.3m-$19.9m), down by 44.5 percent from the year-ago period, on 48.7 percent lower revenues of £55.77 million (€81.4m-$113.1m). TWE sales fell by 29.9 percent to £174.8 million (€255.2m-$354.5m), with licensed apparel down by 58.4 percent. Operating income declined to £9.7 million (€14.2m-$19.7m).
In the first half, Umbro recorded double-digit growth in Eastern Europe, the USA, Latin America and China, but it suffered a big drop in the UK, where its England jerseys have not been selling as well as before. The sell-through of England replica jerseys was disappointing during the critical summer months. The company was expecting a decline below targeted levels for 2008, unless the English team qualifies for the Euro 2008 championships, which is looking very hard at this stage, particularly after it lost an important match against Russia last Oct. 17.
Nike officials are optimistic about Umbro, citing what they have been able to do with Converse, which has been growing at a compound annual rate of 22 percent since Nike’s takeover in 2003, and which continues to work successfully on a licensing mode in many European countries. The team sports business is somewhat different, however. Nike did not do well with another important team sports property, Bauer, probably because it is much more geared to hardware and because hockey is only played intensely in certain countries. The same can probably be said about Adidas’ previous acquisition of Salomon and Quiksilver’s more recent takeover of Rossignol and Cleveland Golf. It is not sure who may want to take over Bauer. Observers speculate that New Balance may be a candidate, as it already owns another hockey brand, Warrior.
