4 Reasons A Finish Line-Sports Direct Deal Could Make Sense

Finish Line Inc FINL stock is up more than 26 percent in the past five trading sessions on rumors of a potential buyout by the U.K. company Sports Direct. A deal would likely come at a steep premium to Finish Line’s recent market price, Wells Fargo analyst Tom Nikic said Thursday. 

Nikic pointed out that Finish Line currently trades at just 4.5x fiscal 2018 EBITDA. The lowest earnings multiple on any buyout in recent years was Staples, at 5.5x forward EBITDA. (See Nikic's track record here.) 

Staples was operating in a business supplies industry that is in secular decline, and the company had been consistently reporting negative sales comps for more than a decade. Finish Line’s business is better-positioned, Nikic said. 

“We believe a reasonable range of takeout multiples of 5.5x-6.5x would yield potential takeout prices of $14-$16, which implies potential upside of 20-35 percent above FINL’s 9/28 closing price ($11.66),” he said. 

In his note, Nikic outlined four reasons a deal makes sense for Sports Direct:
1. The British company is looking for ways to penetrate the U.S. market.
2. There is potential to differentiate the Finish Line brand from rival Foot Locker, Inc. FL.
3. Increasing the Sports Direct sales base would provide more leverage when negotiating with vendors.
4. Finish Line is exactly the type of struggling, low-valuation business that Sports Direct has acquired in the past.

Given the increased possibility that a buyout is imminent, Wells Fargo has raised its price target for Finish Line from $9 to $12 but maintains a Market Perform rating for the stock.

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Photo courtesy of Finish Line.