Cabela's Investors Say They'd Want $60 a Share or More in Buyoutby
Outdoor retailer being pushed by activist to consider sale
One shareholder says it would take $72 price to get his vote
Cabela’s Inc. is attracting takeover interest at a per-share price range in the $50s, people familiar with the discussions said last week. But it may take significantly more than that to satisfy some longtime investors.
Though Cabela’s sales and profit growth have sputtered, shareholders such as London Co. of Virginia and the Matthew 25 Fund -- owners of an almost 7 percent stake combined -- see a strong brand with long-term expansion prospects. The chain, which sells hunting and camping supplies, also has a lucrative credit-card business with almost $5 billion in loans, as well as real-estate holdings worth about $1 billion. The company’s total market value is $3.2 billion.
Mark Mulholland, who runs the Matthew 25 Fund, said he would refuse anything below $72 a share if there’s a takeover attempt for Cabela’s. And he’d try to get fellow shareholders to do the same. Mark DeVaul, a portfolio manager at the London Co., said he’d be comfortable with a bid around $60. London Co. owns 5.3 percent of Cabela’s -- making it the fourth-largest holder -- while Matthew 25 Fund has a 1.3 percent stake. The stock closed at $46.52 in New York on Monday, the sixth straight day of gains.
“If the price was in the $60s, I’d vote adamantly against it and try to drum up other people to vote against it,” Mulholland said.
Cabela’s, based in Sidney, Nebraska, declined to comment.
Activist investor Elliott Associates kicked off the takeover speculation on Oct. 28 when it disclosed ownership of 6 percent of Cabela’s and vowed to push for changes. It also has derivatives that amount to an additional 5 percent stake, the firm said. The retail chain is “significantly undervalued,” Elliott said at the time.
Since then, Cabela’s has been fielding takeover interest and weighing whether to begin a sales process, according to people with knowledge of the deliberations. The chain is working with its regular advisers at Guggenheim Partners, which has begun reaching out to a small group of potential private equity buyers and strategic acquirers, the people said.
Buyout firms such as KKR & Co., Hellman & Friedman and TPG Capital may be interested in bidding for the company, according to the people. Several firms have expressed interest in a deal that could value Cabela’s at a price in the mid- to high-$50s, two of the people said. Bass Pro Shops, meanwhile, is working with JPMorgan Chase & Co. to help it explore a bid for Cabela’s, other people said.
Hirzel Capital Management, which owns about 2 percent of Cabela’s, had already been pushing the retailer to review strategic alternatives, including selling its credit-card unit and property. It’s met with Cabela’s management multiple times this year and sent a letter to Chief Executive Officer Tommy Millner advocating for changes.
“We are not surprised to see other investors draw the same conclusions,” Hirzel said in an e-mail. “We expect the board to do whatever is in the best interest of shareholders.”
Millner said in September that spinning off real estate made “no sense” and the credit-card unit is too important to its retail business. Instead, he pointed to plans to spend $500 million on share buybacks as a way to boost shareholder value.
The main reason that investors say they would hold out for a higher price is Cabela’s still has room to grow. It has 77 stores in North America and says it has the potential to almost triple that to 225.
“We see value in the brand and value in the credit business, and we like the company’s ability to scale nationally and open a lot of stores,” said DeVaul of the London Co., which has owned Cabela’s since 2009. “You might get a near-term pop with an acquisition, but longer term they might be better off running the company as they are.”
Mulholland agrees, and that’s why he would hold out for $72 a share. He gets there by giving Cabela’s a value of 10 times its estimated 2016 earnings before interest, taxes, depreciation and amortization. On that basis, the chain currently trades at about 6 times. PetSmart Inc. was acquired earlier this year for 8.4 times its 2016 Ebitda estimate. A similar valuation would price Cabela’s at about $61 a share.
A $72 price would be more than a 50 percent premium over Cabela’s closing price of $46.52. While that valuation may seem far-fetched, it might make sense given the growth opportunities and an improving credit-card division, according to Patrick McKeever, an analyst for MKM Partners. The shares were trading at almost $60 in March and topped $70 in 2014.
“A price in that area seems aggressive to where the stock is today, but it’s a reasonable number,” said McKeever, who has a buy recommendation on the shares. “It’s been there before.”