The market for luxury sports footwear looks set to widen over the next years after the acquisition of a blocking minority interest in Puma by the PPR Group, the French luxury and retail conglomerate that owns Gucci and many other fashion labels. It’s hard to estimate the size or the potential of this emerging market, but it is clearly shaping up as an interesting segment of the overall footwear market, combining fashion and comfort with creativity and the use of high-value materials and components.
Apart from Nike, which has done a great job with Cole Haan, the sports brands have generally sought to acquire other sports companies. Starting with LVMH, which is PPR’s arch-rival, the fashion and luxury goods companies have done more or less the same, neglecting and ignoring the sports world in spite of its presence in numerous boutiques and shoe shops, but the combination of PPR and Puma is creating a new dimension in corporate takeovers and mergers.
Symbolizing the growing interpenetration of fashion and function, which is inundating the market through an increasing variety of more or less fashionable «low-profile» or «fusion» classic and retro models by many sports brands at all price levels, led by the likes of Converse, Fred Perry, Lacoste or Onitsuka Tiger, it comes at a time where innovative and tasteful style features are becoming more important as a selling argument in every field, and it is offering the potential for some very interesting types of synergies.
The tie-up is not yet a full marriage, but it looks like a solid and passionate engagement. PPR has agreed to buy a stake of 27.1 percent in Puma from Mayfair, a holding company for two heirs to the wealthy Herz family, at the price of €330 a share. The agreed price, which followed what was described as a rapid but “tough” negotiation, is 24 percent higher than Puma’s average value on the stock exchange in the month prior to the rumors about the change of ownership one week ago, which immediately pulled Puma’s share price up by 10.3 percent.
PPR didn’t have to bid for the rest of the equity until reaching the threshold of 30 percent, but it has decided to make a voluntary offer to buy all the other remaining Puma shares at the same price of €330 per share, which values Puma at about €5.27 billion. The move is fully backed by the board and the management of Puma, which are happy to draw on PPR’s resources and expertise in its latest phase of development.
In disclosing its own positive results last month, PPR indicated that it was willing to invest up to €1.07 billion on acquisitions following the recent sale for a similar amount of Au Printemps, the big French department store chain, and other more marginal activities. Standard & Poor’s has warned that it may have to lower the credit rating of PPR if it would gobble up all of Puma’s shares.
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.
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.
Puma’s shares briefly hit a ceiling of just over €350, as some investors speculated on a possible counter-bid or on an improved offer by PPR, but the share price has since eased down to just over €340, probably indicating the investors feel that the tie-up with PPR will improve Puma’s fortunes in the long term.
At a joint press conference at Puma´s brand center in Nuremberg yesterday, François-Henri Pinault, PPR’s chairman and chief executive, stressed that the deal would create plenty of opportunities for “cross-fertilization” - not only providing support for Puma’s on-going expansion, but at the same time perhaps enabling some of the PPR luxury fashion brands to offer sports-oriented footwear ranges – an area that Gucci and the other brands in its portfolio have not yet tapped into, unlike Prada and others.
Equally upbeat, and evidently in tune with Pinault, Puma’s chief executive, Jochen Zeitz, rapsodized about a «symbiotic» relationship between the two prospective partners, noting that both value such concepts as creativity and longterm brand-building. He stressed the fact that the partnership would not entail any risks of cannibalization - unlike other recent transactions in the sports arena, led by the Adidas acquisition of Reebok.
Along with Gucci, PPR owns Yves Saint Laurent, Sergio Rossi, Balenciaga, Alexander McQueen, Stella McCartney and Bottega Veneta, all of which have been diversifying their ranges like Puma. McQueen has already designed some high-end sneakers for Puma, which claims to have been the first sports brands to have teamed up with a fashion designer when it worked with Xuly Bet in France in 1994. It has since carried out cooperative projects with Jil Sander, Yashuhiro Mihara, Marc Jacobs, Neil Barrett, Philippe Starck and J. Lindeberg as well.
Similar kinds of collaboration were struck recently between others sports brands and other fashion designers. Adidas has done it recently with Yohji Yamamoto and with Stella McCartney, more for the image than for the turnover as its sales of the related products represent less than 1 percent of its total turnover.
While recognizing the strategic benefits of the tie-up, many investors have been grumbling in the last few days that the price offered by PPR for Puma’s shares was too low. Shortly after the formal announcement of the bid, Puma’s shares already stood above the price offered by the French company. Still, Pinault repeatedly stated that the bid was “firm and definitive.” He could conveniently refuse to lift the price by arguing that this would endanger PPR’s credit rating.
As his aides later explained, PPR would be happy to hold on to its 27.1 percent stake, since it would effectively control Puma anyway through a blocking minority interest and by having three representatives seated on the German company’s 6-member supervisory board. Furthermore, under French regulations, such a small stake is sufficient for PPR to fully consolidate Puma’s results, which will help to enhance its balance sheet. Ever since Zeitz took on the helm of Puma in 1993, the company has been supported by financially strong investors who owned less than 50 percent of its shares – Proventus, Monarchy Regency and Mayfair.
Shareholders attending Puma’s annual meeting on Wednesday agreed to elect PPR’s three directors on the board, replacing three representatives of Mayfair as soon as PPR’s acquisition is cleared by European authorities. This is expected to happen in June, which would enable PPR to close the transaction in July.
As part of the agreement, Puma’s management should retain a large degree of independence, based on the policy of “freedom within a framework” that PPR has applied to Gucci Group’s management after it took over its full control in 2004. In a letter of intent, PPR has guaranteed that Puma’s head offices in Herzogenaurach, Hong Kong and Boston would all remain untouched; and that the move would not entail any staff cuts. The contract of Jochen Zeitz, who owns no shares in Puma but has many stock options, expires in 2009.
No specific quantitative synergies are expected from the partnership, but there should be many important qualitative synergies. In discussing what they described as a «strong strategic and operational overlap,» they two executives listed a large number of benefits from their collaboration:
· Puma could make very profitable use of PPR’s expertise in retailing and merchandising, developing better store concepts that will maximize sales per square meter. PPR could help Puma to accelerate its own store openings and thereby lift the percentage of the turnover obtained through its own stores above the current level of 14.5 percent.
· The tie-up will help Puma to tighten its relationships with certain types of key accounts such as the department stores, particularly in the USA, where the French company’s luxury brands are strongly represented and where Puma has found it difficult to deal with Foot Locker.
· Puma would not specify the amount of sales it is getting through the internet, a medium that Nike has begun to use heavily in Europe, but Puma will be able to benefit from PPR’s strength in this sector through Redcats, a mail order and e-commerce platform based in the USA that belongs to the French group. Pinault says PPR has reached annual sales of €1.6 billion on the internet, ranking as the world’s fifth-largest platform in terms of on-line clothing sales
- PPR’s expertise in design and sourcing of high-end products could also help Puma to widen its offering, notably in apparel and accessories. Footwear currently makes up about 60 percent of Puma sales, but PPR’s support could bolster the German brand’s sales of apparel and other categories, from eyewear to small leathergoods. PPR’s mail order operations have a strong apparel sourcing base in the Far East.
· PPR’s know-how in the sourcing of high-end fashion products could prove particularly useful to Puma to speed up product cycles, particularly for its less technical products. Its lead times currently range from 18 months or more for technical performance footwear to about five months for more fashion-oriented items.
· PPR can also offer the benefit of its expertise in logistics and advertising.
· Managers of both companies are looking at many joint brain-storming sessions.
Furthermore, Jochen Zeitz expressed strong interest in the French company’s expertise in the successful management of «multiple aspirational brands,» particularly within the Gucci Group. Puma already owns Tretorn and, when unveiling the brand’s so-called Phase IV of development through 2010, Zeitz stated that the company would be looking at relatively small acquisitions, making up no more than 10 percent of the group’s sales, but he indicated yesterday that he could be more flexible about that.
Pinault indicated interest in building up a portfolio of sports brands around Puma in the long term, but he immediately quashed speculation that Puma might be interested in gulping Umbro. Rumors on a sale of the British football brand have been circulating for a while, but Pinault said that it would be nonsensical for Puma to buy a company competing against its own brand in the sports market.
In spite of the qualitative synergies expected from the deal, Zeitz said that it would not lead to any changes for the company’s targets this year. He would not lift his objective of reaching €4 billion in sales by 2010, but he has previously set reasonable targets that he has been able to achieve ahead of time, surprising competitors and investors alike.
Zeitz also stressed that he had no intention to shift the positioning of Puma, moving the brand more into the luxury sports segment. The current balance between sports and fashion will remain, he said, but PPR’s help on the fashion side will help Puma to concentrate on building up further its credibility in the sports segment.
Called “Black Station,” the top range of Puma’s product line, which is sold mainly in exclusive boutiques and shoe shops through a different sales network, currently represents less than 10 percent of Puma’s entire turnover. The whole “sports lifestyle” segment represents about 75 percent of Puma’s product range.
As Pinault put it, within the PPR Group Puma will occupy the middle of the pyramid, between its own luxury goods division, represented by Gucci Group, and its multiple retail operations, which address a much broader clientele.
In making the investment, PPR was particularly attracted by the high level of Puma’s sales growth and profitability, with profit margins that frequently climbed over 20 percent in the last few years. The company’s sales have been growing at an average rate of 20 percent a year since Zeitz took over the helm of a loss-making Puma in 1993.
As for PPR, it can now boast a strong return on its expensive previous investment in Gucci Group. The luxury goods segment represented 43 percent of its operating profit (EBIT) of €1,275 million last year, growing by 44.2 percent to €565 million. Including other continuing operations, PPR’s net profit grew by 31.5 percent to €698 million on 5.9 percent higher total revenues of €17.9 billion.
The operating margin of Gucci and Bottega Veneta continued to increase, reaching levels of 29.1 percent and 20.5 percent, respectively. Yves Saint Laurent reduced its operating loss by 25 percent to €49 million, and the «other brands» of Gucci Group began to generate a small profit overall.
Pinault also said he was attracted by Puma’s leadership in the sports lifestyle segment and by the company’s “world-class management,” led by Zeitz. 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.
For Puma, the partnership with PPR comes at a time when its growth has been slowing down, creating the need for new initiatives and brand extensions. As part of its current Phase IV development program, it has decided to enter a total of seven new categories, starting with golf, sailing, denim and swimwear.
Utterly relaxed, Zeitz and Pinault both appeared on the stage of the press conference yesterday without a tie and with the two upper buttons of their white shirts open. Just before the presentation, the three prospective French board members of Puma even changed their shoes: Pinault and two of his aides at PPR - Jean-Francois Palus, chief financial officer, and Gregoire Amigues, strategic development manager - all slipped into black Pumas.
As a symbol of the intended cross-over between sports and luxury, Zeitz offered Pinault a pair of black Puma shoes made of stingray - intended for his fiancée the Mexican actress Salma Hayek. The shoes are part of the upcoming Puma range designed by Alexander McQueen, retailing at an eye-popping €600 a pair. Pinault clearly wasn’t certain that Hayek would appreciate the gift, but his enthusiasm soon rose when he heard the retail price.