While adidas AG (ADR) (NASDAQOTH: ADDYY) is not quite as large as Nike, its reach remains incalculably greater than that of K-Swiss. The company markets its products to soccer players, runners and other athletes on a global basis and earned more than $680 million on revenues of over $19 billion in 2012. Like Nike, Adidas enjoys tremendous public exposure through a multimedia marketing campaign and endorsements from high-profile athletes. Given its reputation for quality and innovative design, it also enjoys greater pricing power relative to its American competitor.
How the Deal Is Structured
Under the terms of the deal, E.Land will issue cash payments of $4.75 per share to K-Swiss shareholders as of March 8, 2013. Relative to K-Swiss’s current share price of $4.72, this represents a premium of about .5 percent. Relative to K-Swiss’s pre-announcement closing price below $3.20, this offer represents a premium of nearly 50 percent. The deal had been expected to close before the end of the second quarter of 2013. However, it may be delayed somewhat by ongoing legal action.
Legal Issues and Complications
Soon after the deal’s announcement, major K-Swiss shareholder David Raul sued the company in a Delaware court on the grounds that the buyout offer substantially undervalued its assets. News shortly broke that various law firms were investigating the possibility of forming a class to bolster the suit.
At this point, it is unclear whether this legal action will be enough to derail or delay the deal. For reference, many market-watchers do believe that E.Land’s offer is less than fair. However, the company’s performance has been so abysmal of late that many investors may be willing to cut and run. The perception that it is beset by various structural and brand-management issues certainly does not help its case either.
In addition to these legal issues, the buyout is subject to other customary closing conditions. These include full regulatory approval and a positive outcome of a shareholder vote on the matter. The shareholder vote is currently scheduled for April 26, 2013.
Long-Term Outlook and Possible Plays
It is clear that K-Swiss made a crucial mistake by failing to expand its brand’s appeal to non-athletes. At this late hour, it may well be too late for it to repair the damage that it has inflicted on its brand and continue on as an independent company.
Given the small premium that this deal offers, investors who do not believe that K-Swiss is worth more than $4.75 per share may wish to remain on the sidelines. Those who do believe that the deal undervalues K-Swiss may instead be inclined to initiate a long position in the company in the hopes that E.Land is forced to come back with a better offer. At least one prominent investor has already done this.
In sum, E.Land’s buyout offer for K-Swiss may represent the company’s last best hope. However, it does not provide short-term shareholders with tremendous value. At the same time, the possibility that E.Land may be forced to make a higher offer for K-Swiss should entice casual investors. Anyone who has an interest in the apparel market would do well to watch the company at these levels.
The article No Longer In Style And Going Private originally appeared on Fool.com and is written by Mark Thiessen.
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