Will Adidas and Reebok Go the Distance?

There is "much to like" in German running shoe maker Adidas's €3.1bn purchase of US rival Reebok, says Lex in the FT. The sportswear group isn't cheap, at about 40% above the average share price over the last three months, but the businesses "complement each other well" and if annual cost savings of €125m a year from 2008 are achieved, that trims the price tag "from 18.5 times to just over 14 times this year's earnings".

What's more, wholesalers "need all the clout they can get with big retail customers", says Camilla Palladino on Breakingviews.com, and the combined group will now "almost match" market leader Nike in size.

But there is a catch. Adidas shareholders could just have gone out and bought Reebok shares without paying the "€1bn or so premium" that Adidas has shelled out. The German group needs to do more than just cut costs, and while it reckons it can do so, by developing Reebok's brand in Europe and Asia and improving its merchandising in the US, not everyone is so sure. Such "revenue synergies are notoriously harder to deliver" than cost-cutting.

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Moreover, while shareholders seem to have given Adidas the benefit of the doubt following the 7% jump in Adidas shares that trade on the German Dax index on the news of the deal they should be careful, warns Lex. Adidas shares trade at a "pretty hefty" 18.2 times 2005 earnings, and shoe makers, like the sportspeople who wear them, have a "tendency to stumble whenever things have gone well for a while."

And management distractions during the integration process could benefit Nike in the short term, said a Goldman Sachs analyst on CBS Marketwatch, while in the long-term, Nike's brand strength will protect its franchise from erosion.