Nike has high hopes for Umbro. The world's leading sports brand targets football as a key growth category, and its US$582m bid for Umbro will undoubtedly shake up the sportswear sector. Joe Ayling looks at how the synergies between the two companies stack up.

Nike Inc this week took another step towards its target of becoming the world's dominating football brand by 2010 with a GBP285m (US$582m) takeover offer for Umbro, the UK company solely dedicated to "the beautiful game".

The Oregon-based company already has a firm foothold in the sector, selling football boots and replica kits to a vibrant market of fans and players.

In acquiring Umbro, it will also take on a series of valuable sponsorship deals, including the England football club and two of its best players.

And this will go some way towards catching Adidas Group, its German counterpart with a parallel football reputation, and Puma, another brand with high exposure in the game.

It seems unlikely that a rival bid will surface for Umbro, which has been on the sale rumour mill for nearly five years.

However, with two of the UK's top sports retailers - Sports Direct and JJB - taking up significant stakes in Umbro over past weeks, will the politics and synergies of this dynamic deal add up?

Nike's 61% premium
Nike's all-cash offer of 195 pence per share for Umbro represents a 61% premium on Umbro's closing price of 120 pence before it announced a bid approach last week.

The offer was extremely well received by Umbro, which recommended that shareholders accept the agreement.

Umbro CEO Steve Makin says: "We will be a stronger and better business as part of Nike and this deal will allow us to accelerate our existing growth strategy by leveraging Nike's global resources and expertise. We look forward to taking Umbro to new levels with Nike's support."

The company's shareholders are likely to be encouraged by backing of the offer from the UK governing body, the Football Association, with whom Umbro holds a log-term kit deal for the English national team.

Brian Barwick, CEO of The Football Association, says: "The FA has enjoyed an excellent partnership with Umbro for more than 20 years.

"We are delighted that the proposed acquisition will allow us to continue our strong historical relationship with Umbro while benefiting from the marketing expertise and financial strength of Nike."

Most analysts argue in favour of the deal, realising that Umbro is "no bargain" at the premium price.

Indeed, Nike's price was 15 pence per share above Dresdner Kleinwort's raised offer price. Prior to Nike's approach, the investment bank said that investors should not let this business go cheaply, and suggested a 180 pence per share target price. Eventually, Nike came in at 195 pence.

Nike's premium goes a long way towards dismissing any scepticism over the timing of the offer, which comes just a week after England's national team all but crashed out of the forthcoming Euro 2008 Championship by losing a 2-1 decider against Russia.

Nike president and CEO Mark Parker says: "With its close links to The Football Association and the England team, Umbro's future is even stronger than its past.

"This dynamic alignment of Umbro and Nike, with our complementary strengths and numerous ways to segment and grow the market, will lead the game at every level throughout the world."

JJB and Sports Direct
Two of the UK's top football wear retailers could have a major influence on the deal themselves.

JJB Sports bought a 10.2% stake in Umbro last Friday (19 October) following all the takeover talk, while Mike Ashley's Sports Direct upped its share in the brand to 15.04% last Wednesday (16 October).

Indeed, their combined 25.3% stake in Umbro has the capability to block a takeover because under the terms of Nike's offer the company needs to win approval from three quarter of shareholders.

This seems unlikely, as does a counter-bid, given their collective reliance on a good relationship with Nike as the major supplier.

Dresdner Kleinwort analyst Sanjay Vidyarthi says: "We think this is a good price and would be surprised to see another offer above this level.

"JJB and Sports Direct's stakes look to be strategic but, again, we would be surprised if both did not accept this offer - Umbro's talks seem to have been exclusively with Nike."

A diamond in the rough?
Umbro posted bottom line profits of GBP19.8m for fiscal 2006 on the back of an increased turnover of GBP149.5m.

But this is dwarfed by Nike's total profits of $1.49bn for fiscal 2007, and analysts suggest Nike has the cash to leverage the Umbro brand more than, for instance, a private equity buyer would.

This means that should Umbro accept the bid, its sales are likely to receive a new lease of life. 

In addition to England, Umbro also has key sponsorship deals with Sweden, Norway, Northern Ireland and the Republic of Ireland, and endorses top international players including Michael Owen and Deco.

Nike intends to operate Umbro as a stand-alone affiliate brand, in a similar way to its other portfolio brands, which include Converse, Cole Haan and Hurley International.

Analysts note that Umbro may need a high equity injection given the low visibility of its short term earnings.

"It seems that Nike will keep Umbro as a separate entity. The England contract will stay with Umbro, not Nike, for the time being at least, and assurances have been given to the FA and the terms of the contract have been revised and improved. So the FA poison pill is not going to be an issue," adds Vidyarthi.

The pill he refers to is a clause in the England contract that allows the FA to terminate its contract if Umbro is acquired.

Clash of the titans
Since the early 1990s, Nike has grown its annual football revenues from about $40m to approximately $1.5bn. Adidas Group, meanwhile, reported football revenues of EUR1.2bn (US$1.71bn) in 2006.

The two market leaders have clashed swords regularly, most recently when Nike failed in an attempt to buy out Adidas' contract with the German national team for EUR500m.

Credit Suisse analyst Michael Geiger tells just-style: "Nike is the world's sporting goods market leader. Of course Nike wants to be number one in football, but in this category - Adidas is still number one."

In March last year, Adidas made a high profile addition to its own branded portfolio through the $3.8bn acquisition of Reebok. Reebok has a more versatile and global offering than Umbro, selling into US football and hockey markets too.

Although Nike will take the positives from a cheaper and more specialised unit in Umbro, Reebok has a strong football offering too, sponsoring Barcelona star Thierry Henry.

Market consolidation
In addition, market analysts say that the acquisition is also good news for Adidas, which can draw from consolidation in the marketplace.

Such consolidation has served other industries well, including steel, reducing the number of competing factors.

Geiger describes the sporting goods market as a "homogenous global industry", adding that the top brands are reporting wider price margins with the weakening of the dollar.

Nike targets 25% of revenue growth coming from its portfolio of other businesses by fiscal 2011, so Umbro might be the restart of an acquisitive trend for the sporting goods behemoth.

Its success with Umbro will probably be judged by the next two big football tournaments.

Some analysts view Umbro as a consolation for Nike, having missed out on the German national team. But Umbro could emerge as a superior asset because while the German kit is contracted and domestic, the Umbro brand is permanent and has scope for expansion.

The near half-billion dollar offer seems likely to be popular with stakeholders, including JJB and Sports Direct, who recognise the financial strength of Nike.

If accepted, the new group will place Nike on a level par with Adidas for sales in the world's most popular sport.

But while Adidas and Nike are battling it out on the football field, other sports like American football, basketball, hockey, rugby, athletics and tennis will not be neglected either. Game on.

By Joe Ayling, news editor