Adidas: estimating the credit risk

The Adidas case explores the issue of evaluating the credit merit of a company. Starting from the assessment of the business strategy and the analysis of the competitive scenario and firm-specific positioning, the case moves to a sound financial analysis to be carried out with the objective to assess a built-in rating valuation for the company. Adidas group is a very well-known player in the sportswear industry. This industry is currently living a phase of consolidation, with several important mergers and acquisition deals occurring between major players (the acquisition of Reebok by Adidas in 2005 and the acquisition of Converse by Nike in 2003), and major changes are occurring in the manufacturing process, which is moving towards the outsourcing of the entire production in order to reduce costs. In addition, the industry is increasingly becoming exposed to fashion trends. Analysts believe in a certain growth potential for the main players in the business, mainly driven by developing Asian countries. In this context, the case is intended to teach students how to evaluate the credit merit of a company relying on the common rating methodology followed by major Rating Agencies such as Moody's. The case allows an interesting discussion and analysis of the main factors affecting the capacity of a company to use debt to cover its financing needs.