ANALYSIS: What does PPR’s proposed bid mean for Puma?
The global sportswear market is poised for a shake-up if the proposed acquisition of Puma, the world's third-largest sportswear brand, by French luxury fashion retailer PPR goes ahead. The question for many, though, is where will Puma go from here?
Ever since Adidas bought Reebok last year in a EUR3.1bn deal (US$3.8bn) that shook up the dynamics of the global sportswear market, Puma has been plagued by takeover rumours.
But the most likely contender was always reckoned to be US sportswear giant and the world's number one sporting brand Nike, seeking to buy its smaller rival in an attempt to put more distance between itself and the encroaching Adidas/Reebok combination.
However on Tuesday (10 April), after a weekend of frenzied speculation, it emerged that the French fashion retailer PPR is to buy a controlling 27.1% stake in the German Puma group for EUR1.4bn (US$1.9bn) after reaching a deal to buy out a leading shareholder.
This now paves the way for a friendly takeover offer on the remaining Puma shares, valuing the company at EUR5.3bn (US$7.12bn) - a proposal that is fully supported by Puma's management board, although shareholders are rumoured to be hoping for a higher offer.
The ramifications of the deal are likely to be significant for more than just the Puma business, as Marshal Cohen, chief industry analyst at The NPD Group, explains: "First off, this is about affording a fashion sports apparel brand the green light to grow worldwide and outward beyond just the limits of footwear and sports apparel.
"This is also significant because it enables a fashion brand to step up and try to compete head on with dominant brands like Nike and Adidas…and because it will change the landscape and rules that sports apparel and lifestyle brands will need to play by.
"This will move Puma into the next generation of brands. There are so many ways they can do this, it will be interesting to see how current management handles it."
PPR chairman and CEO Francois-Henri Pinault describes the transaction as "friendly" and "an exciting development for PPR and a milestone in our strategy of profitable growth."
"I am confident that PPR is the ideal partner to support Puma in its current development phase to become a global iconic sportlifestyle company," he adds.
Casual sportswear presence
Despite owning the luxury Gucci Group - which includes designers Stella McCartney and Alexander McQueen who have both designed special collections for Adidas and Puma respectively - PPR currently has no presence in the casual sportswear market.
So analysts believe the decision to buy Puma is a sensible one since it will bridge the gap between PPR's retail and luxury activities. Puma, the third largest sportswear brand behind Nike and the Adidas Group, has annual sales of EUR2.4bn, and PPR has made no secret of the fact that it sees future revenue growth coming from outside the luxury segment.
The acquisition also recognises the growing affinity between the fields of sports apparel and high fashion - the so-called 'sportlifestyle' market that Puma, perhaps more than any other brand, has skilfully captured by designing sportswear that appeals as much to a fashion-conscious audience as it does to athletes.
PPR also points to the "blurring boundaries between traditional categories: high-street fast fashion, premium and luxury," as part of its rationale behind the bid.
But just as important is the fact that access to PPR's in-house design and sourcing skills - not to mention the French's firm retail and brand-management expertise - will help Puma expand its high-end product lines and retail presence.
And, of course, its access to international markets. After all, the deal is a timely one for Puma which is in the expansion phase of a recovery plan launched in 2002. Analysts believe Puma will benefit from PPR's strength in Asia, where the German firm has just begun building up distribution, while PPR has singled out the US market as a key area for expansion.
Marshal Cohen agrees that the acquisition make sense for both companies. "The potential here is worth more today than the future value will bring," he told just-style.
"This expected growth doesn't come without risk and there is no guarantee the team in place is suited for this growth, so additions and changes are likely. The other [reason] is that without an infusion of capital the brand would likely survive but eventually, and most likely faster, begin to wane and loose momentum."
Herzogenaurach-based Puma has seen its sales increase five-fold in the past six years, but has recently been under pressure from falling profits, admitting in February that its net income last year fell 7.9% to EUR263.2m, although sales were up 33% to EUR2.37bn. The company says, however, that most of the profit decline was down to higher costs linked to its expansion.
The challenge now is how to grow Puma's market share while maintaining the cachet and premium margins of its brand.
Once the deal goes through it's likely the landscape will change in terms of both where the product is sold and how it is sold.
"Puma will become a leader in retail not just a piece of the landscape," notes Cohen. "If done right it can be a cornerstone, not just another fashion brand. It has the ability to become a true lifestyle brand if this goes through and not just a lifestyle product which it is now.
"Puma will be able to sell new outlets, direct to the consumer and in all new ways. It could become a core brand for stores and a brand of stores on their own, and coexist like Nike does."
He adds that it's is likely Puma will keep casual sporty in the forefront and not let the trendiness of its products fade. "Like what Juicy Couture did a few years back, it raised the bar in sport casual and grew from there."
For now, though, PPR's offer is subject to approval by German regulator BaFin as well as EU antitrust clearance and other regulatory approvals - meaning that the offer could be completed in early July.
As for the Nike rumours, they refuse to go away, with some analysts saying it could make a counter-offer for Puma. PPR's Pinault, however, says the French company's offer is "firm and final" and that discussion of a Nike bid is merely "theoretical."
Whether or not there is a bidding war remains to be seen. But if it all goes through, there could well be exciting times ahead for the sportswear market.
"If this goes through and management makes the right steps for growth by understanding the new markets and new consumers, the sportswear market will see its impact. But that's a big 'if'. It takes a very different skill set to make that transition," Cohen explains.
By Leonie Barrie.
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