Strategic Financial Management - Analysed company: adidas AG

by

Andreas Klein

1. Introduction 3

2. Value delivery over the past 5 years 4

3. Development of the equity value over the last 12 months  7

4. Equity valuation  10
4.1. Net Asset Value  10

4.2. Price/Earnings Ratio 12
4.3. Discounted Cash Flow  13

5. Critical Appraisal & Conclusion 17

Appendix 1 – Assumptions  19
Appendix 2 – Figures 21

References  24

1. Introduction

The valuation of a company is fundamental for financial and strategic decision making. One of the first structured approaches to assess the value of a company was the so-called Shareholder Value Analysis developed by Rappaport (1986). As shown in the following figure, he identified value drivers in three different areas, namely Finance, Investment and Business. The theory says that improvement of these value drivers leads directly to an increase in shareholder value (Spencer and Francis 1998).

In this assignment, the company to be evaluated, namely adidas, will be presented and then analysed concerning the value delivery in recent years. After that, different methods of company valuation will be explained and applied to adidas. The assignment will finish with a critical appraisal of the findings. Assumptions for the calculations done in this assignment can be found – if not otherwise stated – in appendix 1. adidas (ADS, ISIN De005003404) is one of the leading sporting goods producers. Effective 31 January 2006, it acquired Reebok and therewith increased its sales to more than € 10bn p.a. The purchase price for Reebok was circa € 3.0bn (adidas 2007c).¹

Figure 1: The Shareholder Value Analysis. [figure only in downloadfile]

Another major event in the recent past was a share split with a ratio of 1:4 on 6 June 2006, where the registered nominal capital of € 203,268,220 was divided into 203,268,220 no-par-value bearer shares (adidas 2006). ‘per share’ information given in this assignment is adjusted to this number.

2. Value delivery over the past 5 years

Shareholders of a company are rewarded in 2 forms:
1) Dividends, which are dependent on a company’s dividend policy and
2) Capital appreciation, which depends on the investment policy.

As a result, the Total Shareholder Return (TSR) for adidas from January 2002 to December 2006² can be calculated with the help of the following formula: TSR = Dividends + Capital appreciation (Pike and Neale 2006) The dividends paid by adidas in the years under evaluation were as following: The second factor in the TSR calculation is the share price development, which is illustrated in the following figure:

Figure 2: Dividends paid by adidas (2002-2006). [figure only in downloadfile]

Figure 3: Share price development of adidas (2002-2007). [figure only in downloadfile]

Taking both factors into consideration, the following calculation of the TSR for adidas is the following:

Figure 4: Total Shareholder Return of adidas (2002-2006). [figure only in downloadfile]

As a result, it can be said that over the analysed period, adidas was able to deliver a TSR of circa 86% (78,6% without dividends). This equals an average annual return of 17,2%. In comparison to a reference index such as the DAX³ (+21,8%, i.e. on average 4,356% p.a.), this shows an extraordinary performance and value delivery to shareholders (Onvista 2007a).

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1 For further information on the acquisition, refer to figure 12 in the appendix.

2 In order to guarantee consistency in the calculation (e.g. concerning the dividend payments, only full fiscal years will be regarded.

3 It has to be noted that the DAX is know as a technology driven index. Therefore, it may not be 100% representative for the adidas share. Still, it should be used as an indication for the development of German blue-chips (Deutsche Börse 2007).