Nike (NYSE:NKE) is setting itself up as a big player in golf again by signing phenom Rory McIlroy to a monstrous sponsorship deal. Neither McIlroy or Nike will confirm the numbers, but reports have surfaced that McIlroy's deal is for up to 10 years and as much as $250 million, although ESPN is reporting a five-year agreement is more likely. No matter what the numbers are, this is a big move for McIlroy and Nike.
Protecting the brand
This is a huge move by Nike and one that may be necessary to hold off competition from up-and-coming rivals. Oakley and Puma have become relevant in golf with the emergence of McIlroy and Rickie Fowler, respectively, and designs that have taken more risks than Nike's. Under Armour has also joined the discussion with Hunter Mahan as a sponsor and a slowly emerging golf business.
More established businesses are also fighting to stay relevent in a fast-changing golf game. Titleist is still one of the biggest players in the game and was recently sold along with FootJoy for $1.2 billion. Callaway is a big name, but operationally it's still in a world of hurt with operations that lose money year after year. But if Nike hadn't made this move it could have made a comeback.
With a bigger balance sheet and far more revenue to fall back on, Nike could offer the best golfer in the world $20 million to $25 million per year to be the heir apparent to Tiger Woods. As Tiger's career has tailed off in recent years, Nike had to devise an exit plan. McIlroy isn't a bad backup plan, even at a lofty price.
The rich get richer
For a moment there, Nike seemed vulnerable in golf, but an eight-figure check can solve a lot of problems in business. Now it's time to get down to business and make sure that Tiger and McIlroy are playing with the best equipment in the game. McIlroy is making the switch from Titleist to Nike for all of his equipment, and a falloff in play would be disaster for the company's clubs. If Nike is going to make this deal pay off, it has to be the best in golf, not just pay the biggest names.
Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.