Should Nike Make a Play for Under Armour?

Nike (NKE) needs to start considering what benefits they would have by exploring a purchase of Under Armour (UA). Nike has tried to duplicate many of Under Armour's signature products, including the first product, the Under Armour underwear gear. Additionally, Under Armour's cold gear is a popular item for football players in cold weather games, along with their increasing popularity to younger generations of athletes.

Under Armour's recent introduction of running shoes is also a threat to long term shareholder value for Nike. As of right now, the shoes are barely noticeable to Nike, with billions of dollars of sales in running shoes and running apparel for Nike. Under Armour is only trying to steal a small piece of the pie. But, with young consumers very aware of the Under Armour brand, it seems that Under Armour has the momentum to one day steal a greater piece of that pie. Nike could act now to thwart any chances of Under Armour damaging their market share. Obviously, any threat is years away, but now is the time to put an end to that possibility.

But, the biggest benefit would be a purchase of Under Armour at a depressed price and before they truly start developing momentum as a public company. Currently, Under Armour is trading south of $20 a share ($18.07 as of April 3). Nike could use their $2.6 billion in cash or more prudently offer a deal that includes their stock as consideration.

If Nike offered in the $28-33 a share range they would be offering an excellent premium - a premium that most shareholders will not be able to turn down, and a price the board will have a hard time rejecting (but they will try and try hard).

CEO Kevin Plank would likely put up a strong fight. It is doubtful that he would want to sell the company that he has built from the ground up at such a young stage, or even at all. That is why the strong premium would be necessary. Insiders currently own less than 7% of the company. This means Plank does not have the votes necessary to defeat a strong takeover attempt by Nike. He would have to show his large shareholders that he has a long term plan superior to the offer by Nike. A difficult burden, considering the economy and retail's relative uncertainty.

Nike needs this deal to take advantage of the recession. They have an iconic brand and management has made prudent decisions over the last decade. Nike has a relatively small debt load for a retailer (800 million) and this would not add to that burden. Moreover, Nike still has momentum in a variety of developing nations, introducing Under Armour would only help that cause.

Pulling the trigger now will allow Nike to gradually incorporate Under Armour within their brand and decrease competition for many of the products they sale head to head. This will have the benefit of increasing margins and stifling any attempt at price wars.

Nike can clearly compete against Under Armour, and will probably win most of the battles over the long run. But, instead they could acquire Under Armour at a discount price, use their inventory controls, superior management, and industry knowledge to build a stronger Under Armour, cut costs and create a real asset to shareholders.

Such a purchase would also ensure that Nike's growth continues. Nike is becoming a mature company and growth is still respectable, but Under Armour if properly utilized and managed could add to the bottom line in a big way.

At the very least, Nike needs to consider the option. And if they deem the option to be profitable, they need to act quickly, because Under Armour will not always be trading under $20 dollars a share.

Disclosure: I do not have a position in either Nike or Under Armour, nor have I ever.

Comments

[RockyStocks:]

Here's a link to UA's proxy. CEO Kevin Plank actually has 77.2% of voting shares.

idea.sec.gov/Archives/...

Apr 06 10:50 AM

[KSTHANE:]

Nike tried to purchase Under Armor before they went public and it didn't happen. I've heard that Plank is an extremely arrogant, cocky guy and would be unwilling to sell in this environment.

I think there are better, more distressed properties out there that Nike could buy (DC Shoes from Quiksilver) where they don't have as big a presence. Nike will eventually bury Under Armor.

By the way, Under Armor's shoes are horrible and getting little traction in stores; if Nike wants to buy UA they can do it after the shoe failure materializes.

Apr 06 02:45 PM

[ChipsAhoya:]

If you're thinking about writing the "Nike should buy Under Armour" article that pops up every few months on here, you should do just a little bit of research and find out that Kevin Plank has voting control of UA.


On Apr 06 10:50 AM RockyStocks wrote:

> Here's a link to UA's proxy. CEO Kevin Plank actually has 77.2%
> of voting shares.
>
> idea.sec.gov/Archives/...

Apr 07 10:13 PM