NKE: Buying Titleist/Foot Joy?

I’ve just got my 7th request for my opinion about whether Nike will buy Acushnet, Fortune Brands’ golf division that Bill Ackman strongarmed to put on the selling block. Acushnet has about $1.2bn in sales and 6.5% EBIT margin, and its  core is Titleist and Foot Joy, which combined account for nearly 90% of cash flow. The remainder is split between Scotty Cameron putters, and Pinnacle.  After writing down 80% of the value of Cobra golf, FO sold that part of Acushnet to Puma earlier this year.

 

So should Nike buy Acushnet? When asked this question about other brands that compete with any of Nike businesses, my answer is usually “No”.

 

A good example is Callaway, where people grilled Nike all along to buy it, but their answer sounded something like “We have the athletes, we have the brands, and we have the capital. Why buy for a billion when we can otherwise build for $200mm?”  This posturing has served them well thus far. Remember Adibok? There was 80% overlap between their respective customer and product base. The cannibalization post-merger was almost comical. US share went from a combined 18% to 7% over 3 years. Nike get’s it. 

 

They’re NOT going to buy revenue, but there are certain merits.

 

When I put on my thinking cap and rationalize through reasons behind why Nike would buy Acushnet, here’s where I shake out…

1)      Titleist has a lot of athletes in its stable that Nike would inherit. But let’s be real…if Nike really wanted them it would have already bought them. Their pockets are very deep.

2)      With Tiger’s public persona having tanked, and his standing on the money list having dropped to #20, perhaps it’s time for Nike to broaden its reach. Again, I don’t buy this one. Nike will stand behind Tiger. Remember that Nike stood behind Tonia Harding after she played a role in attempting to crush Nancy Kerrigan’s kneecaps. Tiger will return, and Nike will benefit.

3)      Different price points? Nike only does acquisitions that allows the company to touch consumers it does not already sell to in the course of its base business. That’s not the case here as brand overlap is quite meaningful.

4)      One reason that makes sense is that Nike’s putters have traditionally been punk. Even Tiger uses a Scotty Cameron putter (owned by Titleist). 

5)      The same could be said about Foot Joy. Nike’s product has been very good there – but market share is second to Foot Joy – which is an exceptional brand. This is one business where Nike can leverage its existing infrastructure and take the 10% margins on Foot Joy to something closer to mid-teens.

6)      Defensive move? The only defensive move would be to get this out of the hands of Adidas. After all, Adi bought Cutter&Buck (golf apparel), and Puma bought Cobra. But Adidas has its plate full already in rebuilding its US business, and would likely not choose to add complexity by merging a powerful brand like Titleist into Taylor Made. The customer list is too close, and Adidas learned the hard way with the Reebok acquisition that this does not work.

 

Price tag? An extremely generous multiple of 8x EBITDA suggests around $675 million. Equipment businesses have such volatile cash flow year to year, so valuations are often looked at relative to sales. We’ve seen equipment businesses go as low as 0.3x sales – $675mm suggests 0.55x. Just because Nike has $5bn+ in cash it does not mean that it should overpay.

 

Our sense is that Nike has its hands full with its recently-reorganized product engine and ‘go to market’ strategy. Will it do acquisitions? Yes. But we’re inclined to think that Converse non-US licensees will likely come first.  Would I fall out of my chair if I saw a press release saying that Nike is doing this deal? Probably not. But I’d grill them pretty hard as to why it makes sense.

 

 


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