BPS/Cabela's How LOW Is Too-Low?

Apr 21, 2017
The late United States Senator Everett Dirksen is credited with being pretty casual about spending taxpayer money: " spend a billion here and a billion there and pretty soon you're talking about real money."
I doubt pretty seriously that Bass Pro Shops founder Johnny Morris and his team subscribe to that mindset. They're more likely to subscribe to the Benjamin Franklin theory that "a penny saved is a penny earned." That's why the idea that BPS would essentially overpay shareholders of Cabela's (NYSE: CAB) for their company didn't ring quite true when I first learned of the planned merger. The original announcement set the price per share of Cabela's stock at $65.50/share. In an all-cash deal, we're talking about a $5.5 billion. That's a lot of money, even if you're Johnny Morris and playing the hottest hand since King Midas discovered he had "the touch". Morris isn't cheap, but he's not known to overpay for anything. And Cabela's financial results had already begun to reflect the intense pressures now impacting all brick-and-mortar retailers. With such a hard-bargainer facing Cabela's Tommy Millner and staff, I asked several merger and acquisition valuation specialists I knew what their feelings were about the mega-merger. They responded that the deal was likely to happen, but the price was "far from set" whatever the announcement said. A majority of the industry seemed perfectly fine with the price. But overpaying for underperforming companies is a longstanding tradition when it comes to the outdoors. With many companies still run by enthusiasts instead of bean counters, too-much value is routinely given to the "goodwill and other considerations" line on balance sheets. It's routinely tossed-out or deeply discounted in most acquisition valuations. The entire deal seemed to be in jeopardy after federal officials said they would be looking - hard- at the credit card portion of what turned out to be a bifurcated acquisition. While Bass Pro Shops would be buying the retail business, Capital One would be buying Cabela's World's Foremost Bank business. It would then assume the Cabela's credit card business. With federal regulators putting the brakes on there - and asking for further details of the overall deal, the acquisition timeline looked to be in serious trouble. That's when Columbus, Georgia's Synovus Financial stepped in. It announced it intended to buy "certain assets" of Cabela's financial division. In turn, Synovus would then resell the credit card portfolio to Capital One Financial Corp. Problem solved, it seemed, and the deal was back on track. On Monday, Cabela's quietly revised the sale terms. It would still be selling itself to Bass Pro Shops, but at a price $500 million below the original $5.5 billion valuation. No reasons were given for the $500 million price drop, but it lowers the acquisition price to $61.50/per share, $4/share less than the original $65.50 price. Meanwhile, shareholders of Synovus Financial Corp. were treated to an early first-quarter earnings announcement on Monday. The reason? According to a Synovus spokesman it was "because the release contains an announcement of our acquisition of certain assets and certain liabilities for World's Foremost Bank (WFB), a wholly-owned subsidiary of Cabela's." Why would that trigger an early release of earnings? Because serving as the middle man in the Cabela's/Capital One portion of the Cabela's/Capital One/Bass Pro Shop transaction will net the Columbus, Georgia-based Synovus $75 million. And that cash contributed to a quarterly profit of 56 cents per share. And Synovus also keeps the estimated $1.2 billion brokered time-deposit portfolio of World's Foremost Bank. "This transaction," Synovus Chairman and CEO Kessel Sterling said in a statement, "will provide Synovus with additional liquidity to support organic growth, as well as incremental capital that will be utilized to accelerate progress toward achieving our stately long term (return on assets) and efficiency goals." In short, big profit for smart work. So who pays? Essentially, Cabela's shareholders. That's reflected in the half-billion price reduction. The Cabela's/BPS deal is now expected to close early in the third quarter, subject to "Cabela's shareholder approval, regulatory approvals and other customary closing conditions." The timeframe seems workable, but no one on Wall Street is making book on the final price. As I was told yesterday, "all retail is feeling performance pressure, but companies already having problems are going to be under considerable pressure to perform through the typically slow summer months." You can bet both parties in this transaction will be looking at quarterly numbers between now and Q3. And as always, we'll keep you posted. —Jim Shepherd, Publisher