Yesterday was a bad day for the investors in the Bass Pro Shop Cabela’s merger; Cabela’s stock was down as much as 7% from its previous day close, over concerns that closing of the deal will drag on.
Investors in the Bass Pro Shop Cabela’s merger must have been disappointed when they looked at their Cabela’s shares yesterday. Trading at US$58.55/share by the end of the day, the stock is now almost 12% below the price agreed upon in the merger agreement.
Reasons for concerns in the Bass Pro Shop Cabela’s merger: on December 29, 2016, Cabela’s filed a Form 8-K with the SEC to report two main events:
- Cabela’s and Bass Pro have both received a second request from the Federal Trade Commission (FTC) in the US. While that doesn’t signal that the merger will be blocked, it does give a cue that it will be likely delayed.
- Capital One, which is acquiring the banking business from Cabela’s, has indicated that while it is confident that it will get the approval from the OCC (the US banking regulator), it is unlikely that such approval will occur by October 3rd, 2017.
These are problematic because they represent two serious roadblocks to the closing. While I still believe, like Cabela’s, that it will ultimately get granted approval by the FTC and the Canadian regulators some time in the first half of 2017, the additional twist with Capital One is a bit more worrisome. The focus on the October 3rd, 2017 date is because it is when either party can terminate their commitment to the merger without incurring financial penalties.
What to make of this information: in my opinion, for people already in Cabela’s stock, the best is to wait and see. The merger agreement language does indicate that an alternative agreement could be considered for the banking business transaction, which may allow for an close before the October 3rd deadline (the companies are looking into it). That they don’t succeed to do so by the deadline doesn’t mean that the parties of the Bass Pro Shop Cabela’s merger will automatically terminate the agreement, it just mean that they could do so for free. If nothing material has changed by then, that shouldn’t happen as the deal makes strategic sense for everyone involved. However, if any of the companies in the deal outperforms or under-performs the others significantly over the next 10-12 months, the parties may reassess their position. What’s more, if regulators require significant store sales in order to give their stamp of approval, Cabela’s and Bass Pro may use the banking transaction delay for a quick and easy way out of the merger with no termination fees to pay to each other.
Investors who do not have a position in this merger could consider allocating some funds to it on the hope that a solution will be found to the banking business purchase situation and that regulators will give the nod without requiring significant divestitures. However, they need to be aware that the risk profile of the Bass Pro Shop Cabela’s merger has now considerably worsened due to recent news.
Disclosure: Long Cabela’s.
This article expresses an opinion and the author does not receive compensation for it and has no business relationship with any company whose stock is mentioned in this article; do your own due diligence before making investment decisions.