Finish Line Takeover Talk: Why Sports Direct Could Be in Too Deep to Walk Away

At a time when many signs point to waning momentum across a once-booming athletic industry — speculation that The Finish Line Inc. is on the cusp of a takeover is getting its second wind.

Just weeks after the specialty-athletic retailer adopted a shareholder rights plan, or “poison pill,” a note by Susquehanna Financial Group LLLP analyst Sam Poser suggests the firm is primed for a takeover by U.K.-based Sports Direct International Plc.

We believe that Finish Line will be acquired by Sports Direct [because] SPD has been looking to enter the U.S. market for some time … [SPD’s] management understands the sports retail business, as 85 [percent] of SPD’s revenue, is driven from sports footwear and apparel retail,” Poser wrote last week. “[And] based on the shareholders rights plan and conversations with Finish Line’s management, we are confident that [its] board is willing to speak to suitors.”

Finish Line said in August that it adopted the “poison pill” to “reduce the likelihood that any person or group would gain control of Finish Line through open-market accumulation or coercive takeover tactics.” Poser said the retailer’s management has since confirmed that the board is willing to discuss the sale of the company as long as the purchase price is in the best interests of all shareholders.

In this regard, the “poison pill,” for Finish Line’s part, is a means to “force a conversation” with Sports Direct to avoid open-market takeover at a time when Finish Line’s stock hovers near a five-year low, Poser said.

In April, a U.S. Securities Exchange & Commissions filing revealed that Sports Direct had taken a significant interest in Finish Line — to the tune of 3 million shares. (Sports Direct — with counterparty ETX Capital — holds an indirect economic interest in the shares through a derivative known as a contract for difference, or CFD. Such an interest does not provide voting power or beneficial ownership of shares.)

Since then, Sports Direct has aggressively upped its purchasing of Finish Line shares, both through CFDs as well as outright purchasing beneficial shares. The most recent SEC filing — a 13-D form filed by Sports Direct — shows the company now beneficially owns more than 3 million Finish Line shares and has an indirect economic interest in 8.7 million shares, representing a 29.6 percent economic interest in the shares.

While Finish Line has not publicly discussed Sports Direct’s actions, the firm’s adoption of a “poison pill” follows a similar strategy undertaken last year by then-embattled brand management firm Iconix Brand Group.

In November 2015, Sports Direct began quietly purchasing huge chunks of Iconix shares. By mid-January 2016, it had aggressively snapped up an indirect economic interest in 14.4 percent of Iconix’s shares. The result was industrywide speculation of a takeover. Later that same month, Iconix announced that it had adopted a “poison pill” to foil any improper takeovers.

Now Poser said he has observed a key distinction between Sports Direct’s interest in Finish Line, compared with its interest in Iconix — which did not escalate to a takeover or the purchase of beneficial shares.

Sports Direct has a 13.3 percent economic interest in Iconix through CFDs, and ETX is the counterparty,” Poser explained. “SPD has sold no puts in Iconix, and ETX has yet to file a 13-D in Iconix. We do not believe that ETX would have filed [a] 13-D in Finish Line unless the likelihood of a takeover was increasing … [Sports Direct] has taken economic interest in a number of companies. However, Finish Line appears to be the only company — or one of very few companies — for which [it] has sold put options and gained beneficial ownership.”

Further, Poser said he believes Sports Direct is in too deep with its Finish Line investment to walk away.

Based on the information provided in the filings, we estimate that Sports Direct would potentially lose $72 million to $88 million if it walked away from its positions in Finish Line,” Poser wrote. “We estimate that the takeout price will be $495 million. We believe that Sports Direct would be unwilling to take such a hit.”

Specifically, Poser estimates that Sports Direct would lose $49 million to $57 million from its CFD position, $12 million to $16 million from the sale of its beneficially owned Finish Line stock and $11 million to $15 million from exiting its put positions.

Finish Line has struggled to meet its financial targets for much of the past three years, and talks of a potential new owner have been a boon to the stock. The firm’s Q2 earnings and downward-adjusted forecast, preannounced in August, were once again a disappointment to investors.

Poser, who had been down on Finish Line for years, suggests a takeover by Sports Direct could be just what the business needs to gain solid footing.

Sports Direct would likely keep the Finish Line banner but create a mall-based DSW of athletic shoes, so to speak, and offer current, but not marquee, product at attractive prices,” Poser wrote, noting material opportunities and synergies from a prospective partnership. “Sports Direct currently does a large amount of business with Nike, Adidas, Puma, UAA, Skechers, Fila, K-Swiss and other key brands. Such a concept would likely create a strong niche that would not compete directly with Foot Locker.”

While Finish Line’s stock popped last week on the heels of Poser’s note, today the stock reversed much of those gains. A of 2:20 p.m. ET, the company’s shares were down more than 7 percent to $9.74.

Finish Line declined Footwear News’ request for comment.

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