Foot Locker Inc (NYSE: FL) soared nearly 85% on Thursday after rival Dick’s Sporting Goods Inc (NYSE: DKS) said it will buy the struggling footwear retailer for a whopping $2.4 billion.
Dick’s proposal values FL at $24 a share – a massive premium on its previous close.
However, the acquiree’s shareholders can choose to receive 0.1168 DKS shares for each share of Foot Locker under the terms of the agreement as well.
“This transaction represents the best path for our shareholders and other stakeholders,” said Mary Dillon, the chief executive of Foot Locker, in a press release this morning.
Including today’s rally, Foot Locker stock is up more than 100% versus its recent low.
Why did Dick’s value Foot Locker stock at a premium?
Dick’s has agreed to pay an exceptional 87% premium for FL shares because the acquisition will help it penetrate the international markets for the first time.
Foot Locker is a suitable target for that ambition, given it currently has 2,400 stores in total across 22 countries worldwide.
Buying the owner of notable brands like WSS and Champs also gives Dick’s access to a broader customer base since Foot Locker has significant presence in shopping malls while DKS primarily operates through standalone stores and large-format retail locations.
Plus, the acquirer caters mostly to older, suburban, and affluent customers, while FL serves urban, younger, and lower-to-middle-income consumers, which is broadly known to drive the sneaker culture.
All in all, expanding its reach and diversifying its customer base may be crucial for Dick’s Sporting Goods in retaining its competitive edge and sustainably growing its revenue over the long term.
What FL deal means for Dick’s positioning in the Nike market
Both Foot Locker and Dick’s currently have strong ties with Nike, representing a combined $8.0 billion in sales.
The FL acquisition could, therefore, enable Dick’s Sporting Goods to reinforce its dominance on the Nike market at a time when the sneaker specialist is significantly more dependent on wholesale than it’s been in years.
Simply put, the merger will likely solidify Dick’s position as a leading sporting goods retailer.
The announcement, however, is not sitting particularly well with DKS investors, given the retail stock is down more than 15% at the time of writing.
TD Cowen dubs buying Foot Locker a ‘strategic mistake’
Dick’s plans of buying Foot Locker are not appealing to a senior TD Cowen analyst, John Kernan, either.
In his research note today, Kernan dubbed the acquisition a “strategic mistake”, adding that synergies and integration-related risks could result in low return on capital for DKS.
The analyst downgraded Dick’s stock to “hold” this morning, citing “no precedence of M&A at scale creating value for shareholders within Softline Retail.”
In fact, there are several examples of such deals “destroying billions of dollars in value since we’ve covered the sector,” he told clients.
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