By Thomas J. Ryan
Assured of the strategic benefits of the merger with Cabela’s, Moody’s Investors Service quickly confirmed the debt ratings of Bass Pro Shops.
On October 4, the day after the pending merger was announced, Moody’s placed Bass Pro’s ratings under review for a possible downgrade, citing “significant integration risk” as well as concerns that a “sizable increase” in debt levels may be required to fund the acquisition.
But those concerns were mitigated on October 26 as Moody’s Mike Zuccaro highlighted the potential cost benefits and revenue drivers that come from achieving larger scale, as well as those gained from combining each banner’s strengths. The analyst was also reassured that Bass Pro’s debt leverage would remain the same post-merger, and believes the combination should provide opportunities to lower debt levels in the future.
“The acquisition combines two premier specialty brands in the outdoor sporting goods industry,” stated Zuccaro. “While the proposed financing structure will result in a pro forma leverage that remains around Bass Pro’s current levels, we expect significant de-leveraging to occur over time through revenue and profit growth, margin expansion through synergy realization and debt reduction.”
Subject to regulatory and Cabela’s shareholder approvals, the merger is expected to close during the first half of 2017.
Elaborating on the benefits of the combination, Moody’s, in its report, said the merger should strengthen Bass Pro’s market position in the highly fragmented outdoor sporting goods space and adds to its portfolio of well-known brand names. Synergies are expected to come from combining Bass Pro’s expertise in boating and fishing with Cabela’s hunting and shooting prowess.
“With pro-forma revenue of around $7.5 billion, the company will benefit from larger combined scale that should drive significant cost savings and potential revenue synergies over the next several years,” Moody’s wrote.
From a debt-leverage standpoint, the transaction is expected to be funded largely by non-debt funding sources, including preferred equity and the sale of Cabela’s World’s Foremost Bank (WFB) to Capital One. As a result, Moody’s estimates that Bass Pro’s pro-forma leverage will remain near current levels, or about 5.4 times, for the twelve months ended June 30, 2016. Moody’s also noted that Bass Pro may realize potential upside related to credit card portfolio profit sharing via its proposed partnership agreement with Capital One, NA.
Moody’s expects that balance sheet cash, operating cash flow and excess revolver availability will be sufficient to cover Bass Pro’s cash flow needs over the next 12-18 months. Bass Pro is also expected to repay the $500 million 1.5-year asset sale term loan well ahead of maturity, using proceeds from a proposed sale/leaseback transaction. Additional liquidity will be provided by the proposed $1.2 billion asset-based loan that, despite $500 million used to help fund the acquisition, “is expected to maintain ample excess availability over the next twelve months.”
Going forward, significant de-leveraging is expected to occur over the next three years through a combination of revenue and profit growth, margin expansion and debt reduction with free cash flow. Given the size of the deal, Moody’s expects that once the transaction is complete, further sizeable distributions or acquisitions will not occur over the next few years as the company integrates Cabela’s.
The report notes that Bass Pro’s revenue, EBITDA and EBITDA margins have grown steadily over the past few years as a result of positive same-store sales, modest store expansion and a successful shift in sales toward higher-margin proprietary products. Significant cost reductions in its marine business have also helped profitability.
Moody’s cautioned that the acquisition of Cabela’s would be Bass Pro’s largest to date and brings “significant integration risks.” The deal follows the February 2015 debt-financed acquisition of Ranger boats and subsequent $300 million debt-financed dividend. The rating also considers the discretionary nature of many products, particularly boats, which have highly cyclical demand and account for nearly 20 percent of Bass Pro’s standalone consolidated revenue.
Nonetheless, the rating outlook is positive.
“The positive rating outlook reflects the potential for significant profit growth through synergy realization and loyalty program profit sharing, along with Moody’s expectation that the company will generate strong, positive free cash flow to reduce debt and leverage,” Moody’s wrote. “The outlook also assumes that the company maintains good liquidity and successfully executes on a proposed sale/leaseback transaction to extend its maturity profile.”
The ratings under review included its Corporate Family Rating at Ba3 and Probability of Default Rating at Ba3-PD. Ratings assigned include its $3.37 billion Senior Secured Term Loan due 2023 at B1 and $500 million Senior Secured Asset Sale Term Loan due 2018 at B1. Bass Pro is privately held but has public debt outstanding.
Photo courtesy Bass Pro Shops
