Deutsche Bank Estimates Acquisition Price For Dicks Sporting Goods

Deutsche Bank analyst Mike Baker commented Wednesday on the report that Dicks Sporting Goods Inc DKS may go private.

Baker noted that with “Reuters reporting that DKS is in preliminary talks to be acquired by private equity, we are updating our LBO model, which shows that under certain assumptions, DKS could be acquired in the mid $60 range and generate a 5 year IRR of 20 percent.”

The analyst note cited five key assumptions:

1. “Takeout at 9.5x our 2015 EBITDA, funded 25 percent from equity and 75 percent from debt, using a blended average debt rate of 6.9 percent. This implies a year one leverage ratio of 7.4x, but that would quickly fall to the 5x-6x range as cash flow is used to pay down debt.”

2. “Annual sales growth of 7 percent, 5 percent of which is from new store growth and 2 percent from same store sales growth. We cut cap ex in half to $200mm annually as we are assuming less square footage growth.”

3. “Annual EBITDA margin improvement of 10 bps getting margins back to 2013 high levels of 11.3 percent. This equates to annual EBITDA growth of 8 percent.”

4. “An exit multiple of 8.0x.”

5. “We are using a share count of 120mm”

Baker explained that the firm’s “9.5x takeout multiple is higher than the proposed private equity deal for PetSmart of 8.3x our 2015 estimates (including capital leases) because we think DKS has more potential sales and EPS growth.”

Dicks Sporting Goods recently traded at $54.56, up 10.80 percent.