Bass Pro Shops' plan to buy Cabela's (NYSE: CAB) for approximately $5.5 billion has hit a snag with federal regulators.
Under the terms of the agreement, the two rivals in the hunting, fishing, and outdoor gear space would merge into an entity that would be the dominant player in its market segment, but that's not what's causing problems. Instead, it's a snag involving the side deal that would have Capital One (NYSE: COF) acquire Cabela's credit card business that may hold the main acquisition up or even cause the deal to fall apart.
What is happening?
Capital One has signed a 10-year agreement to issue credit cards to Cabela's customers. To do that, the company is acquiring a separate business, World's Foremost Bank. But it has told Bass Pro it does not expect that purchase to receive federal regulatory approval before Oct. 3, 2017, Reuters reported.
The deal between Cabela's and Bass Pro is contingent upon the credit card issue being resolved. If Capital One can't close its deal before Oct. 3, 2017 then Cabela's and Bass Pro would each have the right to terminate their deal.
What is going to happen?
While technically this snag could cause the deal to fall apart, Cabela's entered the agreement willingly and there is no reason to think either retailer wants to walk away. The company has in fact said it is looking for "potential alternative structures" to allow both the transactions to close on or before Oct. 3, according to Reuters.
Cabela's CEO Tommy Millner explained why his company agreed to sell in the press release announcing the deal.
Having undertaken a thorough strategic review, during which we assessed a wide variety of options to maximize value, the Board unanimously concluded that this combination with Bass Pro Shops is the best path forward for Cabela's, its shareholders, outfitters and customers," he said." In addition to providing significant immediate value to our shareholders, this partnership provides a unique platform from which our brand will be extremely well positioned to continue to serve outdoor enthusiasts worldwide for generations to come.
Everything he said at that time remains true now, and no more logical or better partner for his company has emerged.
It seems likely that no matter what happens with Capital One, the two retailers will find a way to make this deal -- or a similar one -- happen. The credit card complication offers both sides a potential out, but neither actually seems to be looking to break the agreement, so it should take place as soon as regulators sign off on the merger.
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Daniel Kline has no position in any stocks mentioned.