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Jeff Jones: Increasing regulations discourage companies from being publicly traded.
Jeff Jones: Increasing regulations discourage companies from being publicly traded.

Hurdles mount for Bass Pro’s buyout of Cabela’s

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When Bass Pro Group LLC and Cabela’s Inc. (NYSE: CAB) last fall announced plans to merge, the deal was expected to finalize in the first half of the year. But a review by the Federal Trade Commission caused a series of ongoing delays, and new lawsuits brought by Cabela’s shareholders further threaten the $5 billion proposed buyout.

All of this puts pressure on the July 11 shareholder vote and the contract’s Oct. 3 deadline.

Regulatory red tape
The FTC’s antitrust concerns could have been settled seven months ago, but over the course of the regulatory review, additional delays occurred.

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, businesses in large mergers must file with the FTC and wait for a government review before closing the deal.

According to filings released by Cabela’s, the two companies submitted data about their businesses and the industry on Oct. 25, 2016, giving the FTC 30 days to approve the merger. About a month later, the two companies voluntarily gave the FTC another 30 days.

On Dec. 29, 2016, the FTC requested additional information through a standard, open-ended process called a “second request.” That move extended the waiting period 30 days past the point the companies were determined to have “substantially complied” with information requests. In an FTC filing, Cabela’s announced Bass Pro met the standard April 3 and Cabela’s was certified April 14. But the companies recently gave the FTC another extension, now until July 5.

There are historical examples of the FTC blocking or altering large mergers.

Whole Foods Market Inc. was required to sell Wild Oats after acquiring it, because the FTC said it would decrease competition in 17 cities where both stores existed. Bass Pro and Cabela’s operate stores in the same markets – including a Bass Pro in St. Charles 8 miles from Cabela’s in Hazelwood. But the two outdoor retailers have more competitors than the natural food niche stores the FTC previous scrutinized. Academy Sports + Outdoors, Dick’s Sporting Goods Inc., Gander Mountain Co. and Recreational Equipment Inc. have stores in greater St. Louis as well.

Staples and Office Depot also were blocked from a merger in 2016, due to their high combined market share compared with smaller competitors. Staples and Office Depot will collect 81 percent of all office supply store revenue in 2017, according to U.S. industry research service IBISWorld.

Bass Pro operates 99 stores and Cabela’s has 85, according to Springfield Business Journal archives. Its nearest competitor is Gander Mountain with 162 stores.

By revenue comparison, publicly traded Cabela’s reported 2016 revenue of $4.13 billion, and privately held Bass Pro is estimated to generate roughly $4.5 billion annually, according to Forbes. When Gander Mountain was part of the Nasdaq market, it reported $498.4 million in 2004 revenue but has since privatized and filed bankruptcy earlier this year. In May, Camping World Holdings Inc. bought Gander Mountain and the new owners announced plans to close roughly 30 stores in 11 states.

Bass Pro and Cabela’s also are going through procedures with the Canadian Competition Bureau.

Stockholder backlash
Meanwhile, four Cabela’s shareholders – Adam Klein, Bernard Garcarz, Christopher Brown and John Solak – in early June filed separate class-action lawsuits in U.S. District Court for the District of Delaware, claiming Cabela’s communications in regards to the merger were misleading and incomplete.

According to the suits, the plaintiffs claim they have not been given adequate financial analyses ahead of the July 5 shareholder vote and information about conflicts of interest have been withheld.

Attorneys representing the shareholders could not be reached by deadline.

Pennsylvania law firm Brodsky & Smith LLC announced June 9 an additional investigation of potential claims against the Cabela’s board of directors for possible breaches of fiduciary duty and other violations of state law in connection with the sale. The firm claimed the transaction may undervalue the company for Cabela’s shareholders.

With financial backing by Goldman Sachs Group Inc. and Pamplona Capital Management LLP, privately held Bass Pro would buy the Sidney, Nebraska-based competitor’s 68.9 million outstanding shares for $61.50 apiece – down from a $65.50 per share offer in April.

Cabela’s shares opened June 29 at $58.07, and the 52-week range was $45 to $63.60 per share.

In response to the fiduciary breach claims, Cabela’s officials said in an FTC filing, “The company believes that the claims asserted in the merger litigation are without merit and intends to defend against the merger litigation vigorously.”

Stock market woes
Cabela’s, which was founded by Dick Cabela, joined the New York Stock Exchange on June 25, 2004.

If the deal is approved by the multiple parties, Bass Pro founder Johnny Morris would be appointed CEO and majority shareholder of the new private entity.

The tension between Cabela’s shareholders – many of whom are employees – and the board of directors highlights the difference between businesses that open themselves to public trading and those that don’t.

For example, Cabela’s is required to keep shareholders, and ultimately the public, informed about financials details and actions that could affect the success or failure of the company. Dozens of documents have been released from Cabela’s investor relations office since the merger was announced.

Comparatively, Bass Pro has said little, and Communications Director Jack Wlezien said the company is not granting media interviews on the topic at this time.

Jeff Jones, an assistant professor of finance at Missouri State University, said companies like Bass Pro are less likely to turn to the stock market these days due to increasing government regulations.

“Prior to the mid-2000s, companies really wanted to be publicly traded,” he said. “It gave them greater access to capital markets, so they could raise more capital. After the mid-2000s, when the Sarbanes-Oxley Act came about, you actually started to see a reverse trend, and you started to see more companies that were publicly traded now going private.

“And the reason for that is Sarbanes-Oxley increased the cost of being a publicly traded company – because now you had to comply with these additional audit requirements, you had to do all these additional procedures, all these additional filings.”

Cabela’s FTC filings detail how the company unsuccessfully attempted to sell to private equity firms in August 2015. That kind of sale could have ensured Cabela’s operations remained in Sidney, Nebraska, where a sizable number of locals are employed.

Two months later, Elliott Associates, a fund company, bought 11.1 percent of Cabela’s shares and actively proposed the sale of the company to businesses outside of the private equity market – even competitors like Bass Pro.

A representative from Elliott Associates declined to comment on the proposed sale.

Jones said this demonstrates how the founders and managers of a publicly traded company can have their preferences overridden by activist investors who own as little as 5 percent of a company.

“Anyone can become an investor by purchasing shares on the exchange,” he said. “The goal of the company should be to maximize the value to its shareholders. Oftentimes, maximizing that value is not always congruent with maximizing the value of managers of the company. … At the end of the day, if it’s better for the managers to go, and the company to be sold, that maximizes shareholder value. Then that is, from a financial perspective, the appropriate thing to do. Now, of course, if you’re the person that’s running the company and you have these activist investors and they are pushing for a sale, then mostly likely that means you’re going to lose your job. There’s usually a lot of resistance to that.”

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