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Takeaway: UA buying LULU would be one of the most painful mergers in retail history. The big winner would be Nike. That's why it won't happen.

Just because UA’s 43x EBITDA multiple suggests it CAN buy Lululemon at 15x, it does not mean it SHOULD. If it does, we think it will make UA a tremendous short. But we won’t ever make that call, because the likelihood of UA buying LULU is about as high as Nike buying Uber.

Key Considerations

1)      UA wants to beat LULU organically. Not just beat it, but kick it once it’s down, and dance over its grave. Sorry to be blunt, but it’s true. UA has even greater resolve to crush LULU than Nike does.

2)      UA would have to pay $7-8bn for the ‘privilege’ of owning one of the worst-managed brands in retail. That might be ok if UA had experience fixing things. But it doesn’t. In fairness, LULU is so broken it would be hard for even Nike to fix (and not just because Nike stinks at fixing things).

3)      Think of what UA can do with $1bn -- nevermind the $8bn it’d have to pay for LULU. Heck, UA has just shy of $400mm in forward Athlete Endorsement obligations sitting (off) its balance sheet. Nike has about $6.2bn. The difference is staggering. Will UA really invest 20% more than Nike’s entire 5-year forward endorsement obligation budget just to acquire a company it can beat organically with less than 1/10th the capital allocation?

4)      LULU is broken, and UA knows it. What optically appears to be $365mm in EBIT at LULU might really be closer to $275mm after the capital needed to fix the company is deployed – and that’s inclusive of the added top line growth.

5)      UA does not buy broken things. It’s acquisition strategy is to augment the core brand with deals where internal talent can’t otherwise take the brand. Example… MapMyRun, Endomondo, and MyFitnessPal.

6)      The last, and most important factor is Culture. You simply cannot find two more polar opposite cultures (let us know if you can think of any). LULU is a company based on a tree-hugger yogi mentality with little concern for planning, analysis, and close to no sense of urgency. UnderArmour, a short 43-hour drive East, is filled with amazingly energetic, Type-A high-performance athletes camouflaged in business casual clothes. Imagine JJ Watt (DE Houston Texans) in full gear doing ‘warrior pose’ in a peaceful yoga studio…with Nancy Pelosi. That’s about how awkward the cultural matchup here would be.

ACTION ITEMS

If we’re Right: Short LULU

If we’re Wrong: There are two trades.

1) Short UA with impunity on the deal, as this blows up the UA growth story in more ways we can count.

2) Buy every share of Nike you can get your hands on. This would be the modern-day equivalent of when Adidas bought Reebok back in 2006. That handed Nike 10 points of share in Footwear. Rest assured that Nike execs are praying that UA buys LULU. That’s why it won’t happen.