Introduction
On November 13th, 2021, Nike announced the acquisition of RTFKT, a creator-led organization producing digital artifacts, in particular sneakers, backed by NFTs. The deal would allow Nike to exploit the possibilities of the metaverse, leveraging RTFKT’s expertise and community. As announced by the CEO, this transaction serves Nike’s digital transformation objective, and it is the 6th acquisition since 2018 focusing on the digital side of retail.
COMPANY OVERVIEW
Nike
Named after a Greek goddess who personifies victory, Nike was founded by the Stanford graduate Phil Knight in 1964. He was a distance runner back in university and fascinated by how Japanese cameras had replaced the German ones in the US market, he wondered whether Japanese shoes could ever do the same to Puma and Adidas. In January 1964, Phil and his former coach at the University of Oregon Bill Bowerman incorporated Blue Ribbon Sports to operate as the exclusive distributor for the Japanese running shoe brand Onitsuka Tiger in the US. Thanks to the Mexican Olympics in 1968, they were able to sell $300.000 worth of shoes. But they had a big problem since they were not able to keep up with the demand. Onitsuka was satisfied with the domestic market and then sent whatever was left to them. The founders realized that to scale up, they needed to start producing by themselves; in 1971 Nike was officially born, together with the famous Swoosh logo. From then on, the story of Nike became one of growth.
After going public in 1980, Nike overtook rival Adidas thanks to the expansion in new product categories beyond track shoes. In 1982, Nike launched the basketball shoes Air Force 1 and, two years later, it started the partnership with the rookie Michael Jordan. When the Air Jordan 1 shoes were launched, they generated almost $30 ml in less than a month. The Portland-based company signed many more lucrative exclusive contracts with sports icons such as the golf player Tiger Woods, the tennis player Roger Federer and, the footballer Cristiano Ronaldo. Furthermore, another business strategy fostered Nike’s growth: its controversial advertising. The company launched the “Just Do It” campaign in 1988. The combination of professional athletes and motivational slogans that emphasize sportsmanship and health led to customers associating their purchases with the prospect of achieving greatness.
In fiscal 2021, Nike achieved record revenues totaling $44.5 bn and $5.4 bn of profit. The company sells its products through owned retail stores, digital platforms, a mix of independent distributors, licensees, and sales representatives in virtually all countries around the world. The products range from casual sneakers to athletic apparel, embodying a 360-degree lifestyle. The recent years have been challenging due to the pandemic, store closures, supply chain disruptions and more. But throughout, the world’s largest and most popular sports company proved its steadiness and ability to operate through uncertainty. Moreover, the company is putting resources behind its end-to-end digital transformation across the value chain as they unlock more growth and efficiency for the business. After becoming the largest sportswear company in the US in 1989, Nike has remained at the top of the sportswear industry for decades and is practically untouchable. In just over 50 years a man’s dream of better shoes turned into a major corporation worth, as of April 2022, more than $200 bl.
RTFKT
Formed by three friends in 2020 at the beginning of the COVID era, NFT collectibles studio RTFKT (pronounced “artifact”) is a pioneering and innovative digital fashion startup that redefines the boundaries of physical and digital value to deliver next-generation collectibles that merge culture and gaming.
RTFKT uses the latest in-game engines, NFT, blockchain authentication, and augmented reality, combined with manufacturing expertise to create one-of-a-kind limited edition custom sneakers along with unique virtual versions for users (video game enthusiasts) to try on and unlock special effects. In addition to building out its own NFT drops, RTFKT had collaborated with other crypto creators to design items like physical shoes that utilized imagery in other NFT projects, including CryptoPunks and Bored Apes.
The startup raised an $8 million seed round back in May led by Andreessen Horowitz which valued the company at $33.3 million. They plan to scale their team of three by hiring creators and artists, building an NFT marketplace, and investing in people that are helping to develop a metaverse or virtual world.
Industry Overview
The global sports equipment and apparel market size was valued at $470,403 million in 2019 and is expected to grow at a CAGR of 7.2% to reach $817,170 million by 2027.
This growth can be attributed to an increase in sports and fitness awareness, a rise in expenditure on sports training and development among children, and changing paradigm of the educational system supporting the growth of the sports industry and industries related to it. Furthermore, the rise in the state, national, and international level competitions conducted by various governments across the globe leads to increased participation and interest of the youth in sports activities. In addition, a busy and hectic lifestyle coupled with growing instances of people choosing outdoor activities in their daily life boosts the growth of the sports equipment and apparel market.
The global sports equipment and apparel are segmented on the basis of product type, sports type, distribution channel, and region. Based on product type, the market is categorized into equipment, apparel and shoes. By sports type, it is classified into bike, outdoor, tennis, other racket sports, running, fitness, football/soccer, other team sports, winter sports, watersports, and others. In terms of distribution channel, it is divided into online and offline. Region wise, the sports equipment and apparel market is analyzed across North America, Europe, Asia-Pacific, and the rest of the World.
Based on the sports equipment and apparel market analysis, by product type,the equipment segment was the most prominent category in 2019 and is expected to remain dominant during the forecast period. The apparel and shoes segment is expected to grow at a notable CAGR of 7.1% throughout the forecast period.
Based on distribution channels, the offline sports equipment and apparel market segment was the dominant segment in 2019, and is expected to witness a notable growth during the forecast period. The growth in this segment can be attributed to increase in adoption of offline retail formats such as the supermarket and hypermarket in both the mature and emerging markets. Moreover, the one-stop solution provided by these retail formats makes it a very popular shopping option for consumers. Furthermore, these retail formats offer a wide range of products at a competitive price to customers and are usually located at easily accessible areas, which adds to overall attractiveness of this segment.
The key players profiled include Decathlon S.A., Nike, Inc., Adidas AG, Puma SE, Under Armour Inc., Amer Sports Corporation, ASICS Corporation, Gap Inc., and V.F. Corporation New Balance, Inc.
Deal Rationale
The global pandemic has significantly accelerated the digitization efforts of many industries. Especially in the consumer-focused sector of retail, seemingly every brand is betting on the future of metaverse-related technologies through either M&A or strategic partnership. An international shoe powerhouse Nike is no exception, as the acquisitions of RTFTK fall in line with the digitalization effort observed from its last 6 acquisitions. The talented team from RTFTK will enable Nike to continue integrating top-of-line physical products with virtual counterparts. The acquired company will be under the umbrella of the recently created “Metaverse Studio,” which is the department in charge of facilitating Nike’s virtual growth.
Among other reasons for the acquisition is raising completion from other household names such as Adidas. They have recently partnered with the creator of the NFT collection Bored Ape – Yuga Labs. Thus, this acquisition could be seen as a necessary step to keep up with completion. Moreover, RTFTK will assist Nike in other virtual efforts the company has been engaged in such as video gaming, Roblox world NIKELAND, and the development of CryptoKicks. The latter being of the most anticipated projects. The idea is to connect the purchase of a physical Nike shoe with a non-fungible token that could serve as proof of authenticity as well as be traded.
From the perspective of the target company, RTFTK clearly benefits by accessing Nike’s extensive resourcesavailable for growth. The company will maintain its name and the core team to preserve its brand identity, which has been gaining popularity in the NFT space. Furthermore, the deep expertise of Nike employees will certainly aid the innovation and growth processes of this young startup.
Deal Structure
Nike declined to disclose information about the terms of the deal. In order to come up with a possible valuation estimation, BSMAC first tried to gather information about the deal and RTFKT. BSMAC queried S&P Capital IQ and collected equity research on both company and deal. The deal was hardly covered with only Jefferies mentioning it on a side note in one of their analysts’ reports.
As a second step BSMAC undertook a precedent transaction analysis. It researched a peer group similar to RTFKT by using Crunchbase and found five similar transactions. These transactions included the acquisitions of ArtsGalore, Bloxbiz, Polystream, Marvion, and ARWAY. All these companies operate in the same industry as RTFKT and were acquired by bigger firms over the course of the last year. Of these deals, only the terms of the acquisitions of ArtsGalore and ARWAY were disclosed. While ArtsGalore was acquired for a whopping $31.5mn, ARWAY was a much smaller deal with a value of $1mn. As there are no reliable publications or estimations about any multiples of these deals, BSMAC decided to take a conservative approach and propose a bottom-up valuation.
Looking at RTFKT’s most recent financing round of $8.2mn and the underlying company valuation of $33mn, it becomes clear that investors must have taken up an equity percentage in the range of 15% – 20%. Considering this valuation 7 months before the full sale of RTFKT to Nike in December 2021 and the extreme hype regarding the metaverse, it is clear that investors gained a hefty premium on their investment within a noticeably short period of time.
Looking at RTFKT’s operating figures, a high increase in revenues up from only $600,000 in 2020 to monthly revenues of $4.5mn in May 2021 can be seen. Using these financials together with the company valuation of $33mn in May 2021, a revenue multiple on monthly sales of 13.6 or a multiple on yearly revenues of 1.6 can be calculated. Taking then the estimated yearly revenues in 2021 of $54mn and applying the multiple of 1.6 on yearly revenues, we propose a company valuation of $87mn as buying consideration for Nike. Ultimately, this means the investor group of the pre-seed investment round, which invested $8.2mn in May 2021 received an astonishing return in the range of 59%-165% on their investment within just 7 months.
Authors: Ghali Taoussi, Andrew Yerokhin, Gherardo Peruzzi, Jakob Wirth, Letizia Laudicina, Dardi Sulaj
Sources: TechCrunch, Nike, TechTimes, BlockCrypto, Insider Inc., Crunchbase, Statista
Bocconi Students M&A Circle 
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