Merger mania: How Dick's Sporting Goods' acquisition of Foot Locker could shake up retail

Joe Hendrickson

Dick’s Sporting Goods' (NYSE:DKS [https://seekingalpha.com/symbol/DKS]) acquisition of Foot Locker (NYSE:FL [https://seekingalpha.com/symbol/FL]) marks the joining of the largest U.S. sporting goods retailer and the nation's leading specialty footwear chain.

Under the merger terms, Dick's Sporting Goods (NYSE:DKS [https://seekingalpha.com/symbol/DKS]) will acquire Foot Locker (NYSE:FL [https://seekingalpha.com/symbol/FL]) for $2.4 billion, allowing Foot Locker (NYSE:FL [https://seekingalpha.com/symbol/FL]) shareholders to choose either $24 in cash or 0.1168 shares of Dick’s stock per Foot Locker share. The deal is funded by a mix of cash on hand and new debt. The deal is pending a shareholder vote on August 22 and further regulatory approval.

The deal is structured so that Foot Locker will survive as a wholly owned subsidiary of Dick's (NYSE:DKS [https://seekingalpha.com/symbol/DKS]). Both brands plan to retain separate store operations, with Dick’s not immediately seeking international expansion. The combined company will wield substantial negotiating power with footwear giants, particularly Nike (NYSE:NKE [https://seekingalpha.com/symbol/NKE]), whose products account for 30% to 35% of sales at both retailers.

Analysts have been decidedly mixed in their merger assessments.

Bank of America analyst Robert Ohmes thinks Foot Locker (FL [https://seekingalpha.com/symbol/FL]) could benefit from Dick's (DKS [https://seekingalpha.com/symbol/DKS]) omnichannel infrastructure, staging and presentation of brands, and higher margin clearance capabilities. "We expect the acquisition would strengthen brand partnerships given global presence and see sizeable opportunity for combined Nike penetration (~38% pro forma) to return to pre2019 levels pro forma," advised Ohmes.

TD Cowen analyst John Kernan called the deal a "strategic mistake," pointing to Foot Locker's (FL [https://seekingalpha.com/symbol/FL]) prolonged decline and the integrative challenges Dick’s now faces. UBS’s Michael Lasser highlighted the historical difficulty of such retail integrations, but also noted that at the heart of the blockbuster deal, Dick's (DKS [https://seekingalpha.com/symbol/DKS]) is taking a shot at shoes.

"Shoes are the core driver of the category. They are like milk to a grocery store. They have become status symbols. Technological and support mechanisms. Plus, there’s likely more interaction between associates and customers in sporting goods stores with shoes than in other categories," wrote Lasser.

On Seeking Alpha, analyst Alan Galecki [https://seekingalpha.com/article/4800164-foot-locker-lace-up-and-sell] recommended that investors sell Foot Locker (FL [https://seekingalpha.com/symbol/FL]) because the cash offer caps gains and the risk of deal cancellation or no higher bid outweighs potential rewards. Moretus Research [https://seekingalpha.com/article/4797468-dicks-sporting-goods-buy-rating-as-margin-expansion-and-synergies-lead-growth] and Eleceed Capital [https://seekingalpha.com/article/4795312-dicks-sporting-goods-upgrade-to-buy-on-better-near-and-long-term-outlook]both have Buy ratings on Dick's (DKS [https://seekingalpha.com/symbol/DKS]) ahead of the merger.

In addition to Nike (NYSE:NKE [https://seekingalpha.com/symbol/NKE]), major sports footwear and apparel companies such as Adidas (OTCQX:ADDYY [https://seekingalpha.com/symbol/ADDYY]), Under Armour (UAA [https://seekingalpha.com/symbol/UAA]), Deckers Outdoor (DECK [https://seekingalpha.com/symbol/DECK]), and Skechers (SKW) will see altered store dynamics, while sporting goods rivals like Academy Sports (ASO [https://seekingalpha.com/symbol/ASO]), Hibbett (OTCPK:JDSPY [https://seekingalpha.com/symbol/JDSPY]), and J.D. Sports (OTCPK:JDSPY [https://seekingalpha.com/symbol/JDSPY]) may face intensified competition in some product categories.

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