Dick's Sporting Goods-Cabela's Merger 'Makes Sense,' Telsey Analyst Says

• Dicks Sporting Goods Inc DKS shares have lost 28 percent year-to-date, and are trading significantly below their 52-week high of $60.33.
• Telsey Advisory’s Joseph Feldman maintained an Outperform rating for the company, with a price target of $50.
• A combination of Dick’s and Cabelas Inc CAB offers an opportunity to leverage each other’s product mix and real estate, Feldman stated.

Cabela's is undergoing a strategic review. A potential acquisition by Dick's Sporting Goods could prove “highly accretive,” depending on the mix of debt and equity used to finance the transaction, analyst Joseph Feldman said.

The two companies have a complementary product mix – with Dick's offering athletic apparel and footwear and Cabela's specializing in hunting, fishing, and camping. Their real estate portfolios are also complementary, with 77 Cabela's stores and 19 Field & Stream stores, and merely one market with direct overlap, Feldman mentioned.

“A combined company would have greater dominance in the outdoor categories (hunting, fishing, camping), enhanced purchasing power, and solid operating synergies,” the analyst wrote.

He added that there could be $200MM in cost reduction, translating to 2 percent of the combined cost structure. The estimated cost reduction would be achieved over a three-year period, and would be a result of “greater purchasing power and a reduction in SG&A expenses, primarily within labor, advertising, and G&A, partly offset by reinvestment.”

Feldman believes that Dick's would need to pay about $4.9B to acquire Cabela's. This represents a 20 percent premium to Cabela’s shares. For the acquisition, Dick's would need to assume the ~$4.3B of debt outstanding at Cabela's.

In the report our Telsey Advisory noted, “…Dick's Sporting Goods is well positioned to take share of the fast growing athletic apparel and footwear category and should see profitability meaningfully improve as it takes ecommerce in house in early 2017.”