While Finish Line Inc. (FINL) adopted a poison pill to fend off a possible takeover by Sports Direct International plc, one analyst believes that there's a 75% change that Sports Direct will succeed and buy the retailer for about $495 million.
Finish Line adopted a poison pill on Aug. 28. As of the Aug. 21 13-D filing, Sports Direct held a 7.91% stake in Finish Line. Sports Direct's total economic interest, however, is 29.57%, with the balance held through contracts for difference (CFDs).
Finish Line's largest shareholder, however, is Monecor (London) Ltd., doing business as ETX Capital, the counterparty for Finish Line's CFDs. In its own 13-D filing last week, ETX reported its own 21.9% stake in Finish Line as a hedge against Sports Direct CFDs.
Susquehanna Financial Group LLLP analyst Sam Poser wrote in a Wednesday, Sept. 13, note that he does not think ETX's timing is a coincidence. Rather, ETX was likely "encouraged" to file the 13-D by Sports Direct as it attempts to buy Finish Line or by its attorneys to make clear that the company has no activist intentions.
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"We do not believe that ETX would have filed its 13-D in FINL unless the likelihood of a takeover was increasing," Poser added.
Sports Direct, the U.K.'s largest sports retailer, has already made inroads in the United States, paying $101 million for about 50 Bob's Stores and Eastern Mountain Sports stores, when parent Eastern Outfitters LLC went bankrupt last year.
Poser noted that Sports Direct, which called the Eastern Outfitters acquisition a "strong platform with which to rapidly expand our store and web presence in this critically important market," is clearly interested in the U.S. market.
Based on his reading of the poison pill and conversations with Finish Line's management, Poser is "confident that FINL's board is willing to speak to suitors." His projected takeout price of $13.30, a premium of nearly 40%, would seem to fulfill Finish Line's need for any acquisition price to be "in the best interest of all shareholders," he wrote, speculating that the poison pill was intended to "force a conversation" with Sports Direct and prevent it from acquiring control through open-market purchases.
Should Sports Direct succeed, Poser predicts it would turn Finish Line into a mall-based retailer like DSW Inc. (DSW) , specializing in athletic shoes, selling "current, but not marquee, product at attractive prices." Sports Direct, Poser wrote, has strong relationships with key brands, including Nike Inc. (NKE) , Adidas AG (ADDYY) , Under Armour Inc. (UAA) , Sketchers USA Inc. (SKX) and Fila Inc. and K-Swiss Inc., both South Korea-owned. This "strong niche" wouldn't overlap with rival Foot Locker Inc. (FL) .
And if Sports Direct walked away and exited its CFD position, Poser estimates the company could lose $72 million to $88 million—a hit it would likely be unwilling to take. For Finish Line's part, if it remained a standalone company, its "lack of identity relative to Foot Locker Inc.'s banners makes it nearly impossible to compete in the malls, even as Finish Line stores are remodeled."
While Sports Direct has taken large stakes in troubled retailers in its home country, including Debenhams plc, French Connection Group plc and Game Digital plc, Finish Line "appears to be the only company, or one of very few companies, for which SPD has sold put options and gained beneficial ownership," increasing the likelihood in Poser's view of an outright acquisition.
Poser also pointed out that Sports Direct increased its targeted net debt-to-Ebitda ratio to 2.5 to 3 from below 2.5, well above its last reported leverage ratio of about 0.7. Sports Direct claimed in a July 20 earnings release that the leverage increase gave it "greater flexibility." The increase could be "a sign that SPD is willing to take on above-average financial risk in order to capitalize on perceived opportunities," Poser added.
Finish Line shares jumped 5.8% to $10.31 in Wednesday-morning trading.
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