Please ensure Javascript is enabled for purposes of website accessibility

Buying Cabela's Still a Bad Idea for Bass Pro Shops

By Rich Duprey - Updated Jul 15, 2017 at 10:14PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This merger of giant sporting goods outfitters could drag both of them down.

It's not too late for Bass Pro Shops to back out of its acquisition of Cabela's (CAB). Sure, it was a lengthy and expensive process getting the deal through the Federal Trade Commission approval process, and Cabela's shareholders just approved the $5 billion merger despite the purchase price dropping from the original $5.5 billion offer. While it might cost Bass Pro a pretty penny in breakup fees if it did back out now, it ultimately could be cheaper for the sporting goods retailer in the long run, rather than going forward and cementing the deal.

The two chains are still awaiting approval from the Federal Reserve, which has to sign off on the sale of Cabela's credit card operation, World's Foremost Bank, to Synovus Financial (SNV 0.10%). Between now and Oct. 3 -- the deadline for closing the deal -- Bass Pro Shops can still walk away from making a grave error. It should consider doing so.

A Bass Pro Shops store

Image source: Bass Pro Shops.

Hook, line, and sinker

Last Tuesday, Cabela's shareholders overwhelmingly approved the company's acquisition by its rival for $61.50 per share, with 78% of the 54 million ballots cast favoring the deal. And why not? While they were originally getting a 19% premium on their stock from Cabela's closing price on Sept. 30 -- the day before the Bass Pro offer was announced -- they're still receiving a 12% and 31% premium, respectively, from the lowered price.

Bass Pro Shops had originally agreed to buy its rival for $65.50 per share, with the stipulation that Cabela's would sell its bank to Capital One Finance (COF 1.40%) in a separate transaction worth $200 million. However, the credit card issuer ran into a roadblock because it is operating under a consent order from the Comptroller of the Currency as a result of money laundering violations. It announced it didn't think it would be able to get the necessary regulatory approvals in time.

While it looked as though the wheels were coming off the transaction, Cabela's got Synovus to agree to buy the bank and then sell the credit card assets and related liabilities to Capital One -- while keeping the deposits for itself.

No sporting chance

At the same time, Bass Pro came back with a new offer for Cabela's, but this time it was a half billion dollars less. Not only was the sporting goods market reeling from the bankruptcies of two giants like Sports Authority and Gander Mountain, as well as smaller companies like Sports Chalet, City Sports, and the parent of Eastern Mountain Sports, but Cabela's own business was also seriously degrading.

Last quarter sales at Cabela's fell 3% to $835 million as same-store sales tumbled 9% on lower firearms and ammunition sales. Worse, internet and catalog sales plunged nearly 13% year over year. It has posted only a single quarter of comp sales growth in nearly four years, and the decline seems to be accelerating again.

Chart of Cabela's same store sales

Data source: Cabela's quarterly SEC filings. Chart by author.

As it's a privately held company, we're not privy to how Bass Pro Shops' business is performing, but one has to assume it can't be escaping from the wreckage of the retail landscape unscathed.

We do know that ratings agency Moody's assigned a lower credit rating to a Bass Pro-secured term loan last November because of the significant risks attached to integrating Cabela's into its own corporate culture, even as it said Bass Pro's outlook was positive because it anticipated the merger to ultimately generate earnings growth.

Yet big mergers sometimes don't work out as intended, as the vaunted synergies often touted fail to materialize. Certainly, there are economies of scale and efficiencies Bass Pro will realize from the merger, but they may be outweighed by Cabela's operations pulling it down.

Going bust in a boom

Over the past few years, the country has seen the gun business boom, yet Cabela's was not able to capitalize on it. It seems to be suffering the same ill effects on its apparel business that every other brick-and-mortar retailer is afflicted with. More troubling is that Cabela's can't get its e-commerce business to gain traction.

Bass Pro Shops may have won the chance to acquire its rival, but it may rue the day when Cabela's shareholders said yes.

Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Moody's. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Cabela's Incorporated Stock Quote
Cabela's Incorporated
Capital One Financial Corporation Stock Quote
Capital One Financial Corporation
$107.82 (1.40%) $1.49
Synovus Financial Corp. Stock Quote
Synovus Financial Corp.
$40.17 (0.10%) $0.04
Moody's Corporation Stock Quote
Moody's Corporation
$312.85 (0.57%) $1.78

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/09/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.