Cabela's Could Be Open To A Lower Price If Bass Pro Shops Reworks Deal, Says MKM Partners

Patrick McKeever of MKM Partners says the weak fourth quarter results of Cabelas Inc CAB adds another thorn in the path for the company’s merger with Bass Pro Shops.

The past October, privately-held Bass Pro Shops agreed to acquire Cabela’s for $65.50 per share in cash, representing an aggregate transaction value of about $5.5 billion.

But, the weak fundamentals at Cabela’s may force Bass Pro Shops to re-think the original deal terms. For the fourth quarter, same-store sales of Cabela’s fell 6.5 percent and non-GAAP EPS of $1.05 also missed, despite better merchandise margins and cost-controls.

Analyst's Take

McKeever cut his fair value estimate on Cabela’s shares from $65.50 to $52, which represents a discount of more than 20 percent below $65.50 per share offer price.

The analyst, who maintained his Neutral rating on Cablea’s shares, said the lower fair value estimate “reflects our view that it is increasingly unlikely that the deal gets done on the original terms.”

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“While re-negotiating the deal involves a number of possible complications, including break fees and potentially finding another buyer for the WFB, we continue to believe Bass wants Cabela's and that there are substantial synergies in combining the two businesses. We also think Cabela's could be open to a lower price,” McKeever wrote in a note.

The Capital One Element

Meanwhile, the lukewarm results of Cabela’s came at a time when the merger is already having several hiccups, especially in the form of Capital One Financial Corp. COF’s acquisition of the World's Foremost Bank, which is stuck in limbo awaiting OCC approval. Notably, the closing of Cabela’s merger with Bass Pro is contingent on the closing of the bank transaction.

But, Capital One, which was set for a multi-year credit card deal with Bass Pro Shops, not expects the banking regulator to approve the deal earlier than October 3, 2017. The October 3 is the date after which either Cabela’s or Bass Pro can terminate the merger, which would combine two legendary outdoor brands.

On the retail side, there are potential anti-trust concerns amid closing of other outdoor retailers. For context, the 160 store Gander Mountain chain (private) is in duress, and MC Sports (private) recently said it would close all of its 68 stores.

“A smaller competitive field could make anti-trust clearance more difficult for BPS/CAB,” McKeever highlighted.

As such, McKeever sees first quarter comp drop of 5 percent and EPS of $0.38 versus $0.43 a year-ago. For the year, the analyst sees a roughly 2 percent comp decrease and EPS of $2.86, better than FY 2016's non-GAAP $2.60 but below levels seen in FY 2013–FY 2015.

At last check, shares of Cabela’s fell 1.06 percent to $45.73.