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Question 1
Analyze the strategic fit between PPR and PUMA. Does this deal make economic and strategic sense?
Let us analyze the deal from both strategic and economic perspectives.
Strategic sense
Point of view: PPR
One of the major reasons for PPR’s management to acquire Puma was the belief that the boundaries between traditional categories such as high-street, fast fashion, sports, premium, and luxury were getting blurred and it made strategic sense to move into the sportswear industry. Within this industry, Puma was one of the few brands with a strong focus on design and fashion that was important to PPR given its focus on luxury items. Moreover, there were several designers in the PPR portfolio such as Stella McCartney and Alexander McQueen who were already working in the athletic sportswear industry. As Puma had a strong international presence and brand equity, it was a very good fit for PPR.
The acquisition of Puma made sense from a financial point of view as well. After the acquisition, PPR would benefit from the high sales growth of Puma with the combined entity (PPR+PUMA) estimated to grow at 6.1% as compared to 5.3% on a standalone basis (PPR). The overall EBITDA and EBIT margins of the combined entity will go up by ~100 bps and this means that the acquisition would lead to higher cash flow generation and would result in higher earnings power.
Therefore, acquisition of Puma made sense as PPR wanted to grow its portfolio with global brands and higher margin businesses such as that of Puma.
Point of view: Puma
From Puma’s point of view, as retail distribution was becoming a key success factor for companies, PPR decided to enhance Puma’s retail capabilities and was planning to support concept store roll-out, strengthen wholesale business through the optimization of the relationship with key accounts, and finally enhance e-commerce through its strong expertise in logistic, inventory management, data collection, and consumer interface. Puma could also leverage PPR’s inhouse design and sourcing skills to expand high end product lines and benefit from PPR’s experience in managing multiple brands.
Economic sense
It is interesting to analyze the revenue and cost synergies.
Revenue synergy would contribute an incremental 3% to Puma’s top-line over 3 years which would mean $16mn incremental EBIT at the 200 EBIT margin. The synergies resulting would be in luxury footwear and designer collaborations. There were opportunities in the distribution area, internet retailing and international expansion.
Cost synergy would be resulting from the following factors:
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Group savings of around 1 percent of combined apparel/accessories cost of goods sold resulting from the
reduction in overlapping experience in sourcing regions such as India, China, etc. The combination of Puma and Redcats would lead to this saving.
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Puma could exploit Gucci’s and Bottega Veneta’s strong expertise in leather goods manufacturing and achieve
additional synergies in specific sport shoes components such as rubber soles (Gucci’s sneakers) but this was
