adidas Shopping TaylorMade Golf

Story Highlights: adidas has already entertained bids for TaylorMade Golf

adidas Group CEO’s statements suggest that a sale is being considered

Any sale would not include adidas Golf (apparel and footwear division)

Is TaylorMade actually for sale? It sure looks that way.

The information from a highly-credible source is that, in early February, adidas entertained an initial round of bidding for TaylorMade Golf.

Six bids were received, five of them from private equity firms, the sixth from a competitor, specifically Bridgestone.

While my source asked that I not share the specifics of the offers, the details provided suggest that adidas and TaylorMade’s suitors are currently somewhere in the ballpark of 150 Million apart.

Sufficed to say a deal is not imminent, however, the latest information I have is that a second round of bids is due soon, and for those interested in the potential for a mega-merger, bad news; Bridgestone is now believed to be out of the running.

No Comment

I reached out to both TaylorMade and Bridgestone asking for comment. Bridgestone politely declined. Emails and text messages to TaylorMade were not returned.

Financial Reports Yield Clues

What I’m being told about a potential sale is particularly interesting in light of the recent financial information released by adidas Group last week; including both its 2015 Annual Report, and its Q4 2015 Earnings Call.

We don’t need to rehash the specifics here. We’ve already published details from the annual report, and other than a 15% year over year decline in Q4, from a numbers perspective, there’s nothing new of particular note from the earnings call.

There are, however, several hints – some more overt than others – that reaffirm the notion that adidas is, in fact, giving serious consideration to divesting itself of TaylorMade. It has also been made abundantly clear that adidas Golf (the apparel and footwear division) would not be included in any sale.

adidas Golf stays with adidas. This is not open for discussion.

A Closer Look at TaylorMade’s potential future

As you may recall from the annual report adidas Group CEO Herbert Hainer said this about the golf division:

“Another important strategic decision will be made shortly. Following a decade of strong and profitable growth, TaylorMade-adidas Golf experienced two very difficult years in 2014 and 2015, caused by a number of structural, commercial and operational issues. As a result, halfway through last year we started analyzing future options for our golf business. This strategic review is expected to be concluded by the end of the first quarter of 2016.” – Herbert Hainer, CEO, adidas Group

There’s more about the restricting program, but the parts relevant to today’s discussion are all here; specifically, the strategic decision (to sell or not to sell), and that part about adidas analyzing future options (also to sell or not to sell).

Those who believe adidas wouldn’t consider selling TaylorMade would likely remind us that, in addition to TaylorMade, adidas’ golf division also includes adidas Golf, Ashworth, and Adams. Maybe it’s only those last two that are on the table?

Straight to the point, adidas Golf isn’t going anywhere. As you’ll see below, that’s been stated publicly in no uncertain terms. adidas Golf actually makes money. Adams and Ashworth will be sold or buried. With Adams there’s no intellectual property, no market share, and short of anything that might be collecting dust in a warehouse somewhere, no product either. What’s the value of a name, a logo, and not much else?

It’s true that Hainer’s statement is vague, which is why I suppose you could argue that any discussion of a sale might not include TaylorMade.

Fortunately for those seeking a bit more clarity, adidas also completed it’s 2015 Q4 earnings call, and while Mr. Hainer stops short of saying “Yes, we are shopping TaylorMade”, in the Q&A portion of the call, it’s made abundantly clear that the option to sell is very much on the table.

During that Q&A session, there were several questions that specifically touched on TaylorMade (suggesting it’s very much on the minds of adidas investors). Three of those, in particular, yielded some genuine insight into whether or not adidas is giving serious consideration to divesting itself of TaylorMade.

As the questions and answers were often multi-part, I have truncated both to isolate only those portions directly related to the golf division. Context has not been altered. Here are those exchanges:

Q: The first question with regards to TaylorMade-adidas Golf, I appreciate that the review is ongoing and will be finalized over the first quarter. But, is there any clarification that you can give today that, effectively, you’ll be reviewing just the TaylorMade part of TaylorMade-adidas Golf and that the adidas Golf element will effectively stay within the adidas brand? A: We definitely will not talk and discuss about the adidas-Golf brand because this would mean we separate the adidas brand and this would definitely not be a wise decision, no. If we talk, then it is only TaylorMade and obviously Adams and Ashworth. Q: And one last one on just understanding when you – in your annual report, you talk about TaylorMade-adidas Golf as a multi-brand category. But, would it be possible still to keep the TaylorMade hardware and then, obviously, the adidas products and just separate Ashworth and Adams Golf so that it’s not anymore a real multi-brand, but just a concentrated single-brand category? A: Yes of course, everything is possible. This is why we exactly do the structural reviewing, the strategic review that we know at the end of the quarter what exactly we want to do with Golf business. The only thing which is a testament is that the adidas Golf will stay within the adidas Group, everything else will be analyzed. Q: Just to be sure, you mentioned Golf as a potential gross margin driver in 2016 as to the restructuring. Is Golf in your gross margin assumptions of 47.3%, 47.8% for the Group, how should we understand Golf in this guidance? A: Your third question was about golf and the margin, but let me make clear for the whole profitability process. Obviously our assumption at the moment is it includes the TaylorMade and the numbers that we have guided too. And we expect the TaylorMade and adidas Golf businesses to grow in 2016 and we expect them also to be profitable in 2016 and we still have some restructuring ahead for us for TaylorMade in 2016 of low double digit number that may lead to a loss in the segment, but definitely the underlying business TaylorMade and adidas Golf will be profitable in ‘16.

Will TaylorMade Be Sold?

So what’s the takeaway? Will TaylorMade be sold?

This is where forecasting gets a bit trickier. How much is TaylorMade worth without adidas Golf (and its apparel and footwear)? Thus far there appears to be disagreement to the tune of around 150 Million.

I won’t pretend to have any concrete answers; I can only share with you what those I’ve spoken with view as the two critical factors that impact the potential for any sale.

The success of M in the marketplace . It seems almost crazy to believe the value – and by extension the potential sale – of what was not long ago a billion-dollar company could be tied to a single product family, but the prevailing wisdom is that if M proves to be the success TaylorMade believes it will be, it might be enough for TaylorMade to gain some actual momentum, and to push the perceived value of the company closer to what adidas would like to get for it.

Here’s the rub. Private equity firms like to buy low, reinvigorate, and sell high. If the actual value of TaylorMade increases measurably, it could limit the upside for anyone buying the company as a mid to long-term investment. The theory goes that a successful and ultimately more valuable TaylorMade actually reduces the likelihood of a sale, or at least a sale to a Private Equity firm.

Herbert Hainer is due to step down as adidas CEO at the end of September . Hainer has said that a decision on TaylorMade will be made by the end of Q1…effectively the end of this month. Even if the decision is to hold on to TaylorMade, it may not be final.

Multiple insiders I’ve spoken with have suggested that Hainer may be sentimentally invested in TaylorMade. He, along with former CEO Mark King, oversaw its growth into a force the likes of which the golf equipment industry will ever see again. After that success, selling low likely wouldn’t sit well. Shareholder pressure would likely need to be immense before he’d be on-board with selling below market value.

Hainer’s replacement, Kasper Rorsted, has no such attachment to TaylorMade. If by the end of Q3 the numbers still suggest that unloading TaylorMade would be in the best financial interest of The adidas Group, there’d likely be fewer reservations about selling.

If what I’m hearing is accurate (and I believe that it is), it suggests that TaylorMade, to an extent, may actually control its own destiny. That is to say that if you buy its products, and help it increase profitability, adidas might be content to let it ride.

The industry insiders and experts I’ve spoken with, however, believe it’s unlikely (though definitely not impossible) that TaylorMade will right the ship in time to stave off a sale. Year over year metalwoods share (January) is stagnant, iron share has declined, and competitors have new product on the shelf. As spring arrives in cold weather climates and green grass shops open for business; if the trends hold, Titleist and PING will likely increase their market share, some of that at TaylorMade’s expense.

None of this speaks to an environment entirely conducive to growth for TaylorMade.

While we can’t say a sale will definitely happen, adidas has opened the lot and shoppers are actively kicking TaylorMade’s tires. Where that leads…

Expect an interesting next few months for TaylorMade-adidas Golf.