Shares of The Finish Line rose 63 cents, or 6.5 percent, to $10.37 on Wednesday after Susquehanna Financial Group LLLP analyst Sam Poser wrote in a note that Finish Line’s adoption of a poison pill will likely lead to an acquisition by Sports Direct.
Finish Line adopted a poison pill on August 28. According to a 13-D filing as of August 21, Sports Direct held a 7.91 percent direct stake in Finish Line although total economic interest was 29.57 percent, with the balance held through contracts for difference (CFDs).
The analyst upgraded his rating on the stock to Positive and his price target from $9 to $12.
“We believe that the poison pill is in place to force a conversation with SPD and prevent a change of control through open market accumulation (of FINL stock) or coercive takeover tactics, especially as the FINL stock price is in close vicinity of its five-year low,” wrote Poser in the note. “Our $12 price target reflects a 75 percent probability that SPD acquires FINL at ~$13.30 and a 25 percent probability that FINL remains a standalone business and the stock goes to $8.”
He said the current stock price, based on his team’s analysis, reflects a 70 percent probability that Finish Line remains a standalone company and a 30 percent probability that Finish Line is acquired.
Susquehanna noted Finish Line’s largest shareholder is Monecor (London) Ltd., doing business as ETX Capital, reported in a regulatory filing last week that it had a 21.9 percent stake and he believes the timing of the disclosure was tied to the poison pill. ETX’s last purchase of FINL stock was made on August 22, 2017, six days before the poison pill was announced by FINL.
He wrote, “We believe that ETX was encouraged to file the 13-D either by SPD, who we believe is attempting to buy FINL, or by the ETX attorneys, who thought it would be prudent for ETX to make it clear that ETX did not have activist intentions. On a side note, SPD has a 13.3 percent economic interest in ICON through CFDs, and ETX is the counter-party. SPD has sold no puts in ICON, and ETX has yet to file a 13-D in ICON. We do not believe that ETX would have filed its 13-D in FINL unless the likelihood of a takeover was increasing.”
Based on his reading of the poison pill and conversations with Finish Line’s management, Poser wrote he is “confident that FINL’s board is willing to speak to suitors.” He also believes Sports Direct would potentially lose $72 million to $88 million if it walked away from its positions in FINL.
Finally, he believes Sports Direct has the knowledge of the sporting goods business and size to complete the acquisition. Sports Direct had $3.7 billion sales in its last fiscal year versus $1.84 billion for Finish Line. in sales in its latest year. The company also earlier this year acquired Eastern Outfitters, including Eastern Mountain Outfitters and Bob’s Stores, for about $101 million to mark its entry in the U.S. Poser noted the Sports Direct said at the time that the acquisition gave Sports Direct a “strong platform with which to rapidly expand our store and web presence in this critically important market.”
As far as potential plans, Poser wrote, “SPD 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,” wrote Poser. “SPD 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.”
Photo courtesy Finish Line