A Takeover of Under Armour (UA) is Nothing to Joke About

Eyebrows in the sports-apparel industry were raised recently after the outspoken, former CEO of yoga-apparel maker lululemon athletica (NASDAQ: LULU), Chip Wilson, took out a bus shelter ad at lululemon's headquarters in Vancouver urging it to acquire Under Armour's (NYSE: UA) (NYSE: UAA) amid the laters epic fall from grace.

Wilson, in a follow-up interview with Bloomberg on the matter, indicated the ad was "just a joke" and was really meant to highlight the reversal in fortunes of the two companies. Under Armour, he highlighted, had been valued by the market at double lululemon, but now the market caps of both companies are around $9 billion. Wilson also said Under Armour was loaded with "junk bonds" while lululemon is debt free. He also described Under Armour as "masculine" and lululemon as "feminine". While on one hand Wilson said his ad was a "joke", he did admit that the two would make a powerful pair, bringing these two elements together. That said, he believes the cultures are just too different for a merger to work.

Shares of Under Armour tanked at the end of January after the company reported lackluster fourth quarter results and what analysts described a "extremely weak" guidance. The company cited numerous challenges and disruptions in North American retail, including the bankruptcy of The Sports Authority.

Adding insult to injury, Under Armour CEO Kevin Plank said that President Trump "is an asset to the country." This sparked outrage among some celebrities, including Under Armour sponsor Steph Curry of the Golden State Warriors. Curry said he agrees with the statement "if you remove the 'et.'" Other celebrities tied to Under Armour also spoke out against Plank's support of Trump, including Dwayne 'The Rock' Johnson.

Given its pristine balance sheet, bankers believe Lululemon could pull off a takeover of Under Armour if it were to take on debt and maybe add a stock component. Alternatively, Under Armour could turn the tides and make a play for Lululemon. While a deal between the two would make a lot of sense, is appears extremely unlikely that the two will ultimately join forces. That said, a takeover of Under Armour by another company should not be ruled out.

Nike (NYSE: NKE) could easily - and BTW would love to - acquire Under Armour, but it may be worried about anti-trust issues. V.F. Corporation (NYSE: VFC) could also be interested as a strategic buyer. Looking overseas, Germany's Adidas AG (OTC: ADDYY) could be seen as a potential suitor for Under Armour. Meanwhile, private equity firms may still find the stock too expensive with an EV/EBITDA multiple of 18 - although the EV/revenue is not out of whack at 1.77x. While valuation would raise concern, an aggressive private equity firm with a long-term horizon may see value in taking the company private, fixing it and cashing out 5-10 years down the road.

While nothing is imminent, if Under Armour's stock continues to flounder it could be vulnerable to activist investors and takeover overtures. Notably, the company does not currently have a poison pill in place.

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