Dick’s Sporting Goods may become the next private equity plaything. The vendor, whose stock is valued at more than $6 billion, is contemplating a leveraged buyout, according to a Reuters report on Wednesday. A relatively clean balance sheet means there is an opportunity to make money. It would, however, require healthy growth assumptions for the company at a time when stiff online competition is challenging many retailers.
The 66-year-old chain of over 500 stores has carved out a strong position in the market for Callaway golf clubs, Louisville Slugger baseball mitts and Remington rifles. It is also a niche that has yet to feel the full force of Amazon and its ilk.
It has only about $200 million of net debt. And it is on pace for earnings before interest, taxes, depreciation and amortization of more than $800 million in its 2016 fiscal year, according to estimates culled by Thomson Reuters, Dick’s financial statements pass the first private equity screen. It suggests there is ample room for a new owner to generate a nice return.
A buyout at a 30 percent premium would value the company at about $7.9 billion. At that price, it would probably require a $3 billion equity check to keep leverage comfortable at about six times Ebitda. That may be too much for a single private equity firm, opening the possibility of a club deal of the sort buyout firms have tried to avoid since the last buyout boom.
With the addition of new locations, Dick’s is expected by analysts to keep increasing Ebitda by more than 10 percent a year through 2018. At that rate, a buyer could reap a 21 percent internal rate of return for itself over five years, according to a Breakingviews calculation. If Dick’s succumbs to fierce rivals on the web, however, the math would change drastically. Take growth down to, say, 3 percent and the investment would return just 7 percent.
There are other factors to consider, including the 60 percent voting power controlled by Dick’s chairman and chief, Edward Stack, who is also the founder’s son. Private equity firms are eager for ways to deploy their abundant stockpiles of committed capital, though. A group led by BC Partners agreed last month to pay $8.7 billion, or a 40 percent premium, for another specialty retailer, PetSmart, which faces similar online pressures. That, as much anything, gives a Dick’s buyout a sporting chance.
Kevin Allison is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
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