Forzani Group Ltd. investors are no doubt pleased about the friendly deal struck with Canadian Tire Corp. Ltd. , which will see the latter buy the sporting goods retailer for $26.50 a share - giving Forzani shares a 49 per cent pop on Monday. Now, investors will be wondering if the deal will mean good things for Canadian Tire.
So far, analysts have been sticking to their earlier recommendations on the stock, but the comments have been upbeat. Irene Nattel, an analyst at RBC Dominion Securities, maintained her "outperform" recommendation and a price target of $76 - implying a return of about 27 per cent from Monday afternoon's level.
She argues that Forzani is a good fit for Canadian Tire because the two companies have complementary businesses, creating a sporting goods "powerhouse" that will shave - by management's estimates - about $25-million in cost savings in the first year alone. Ms. Nattel thinks the savings could be considerably more.
As well, Forzani broadens Canadian Tire's reach to the 18-34 year-old mall dweller, giving a potential powerful earnings boost. Indeed, she believes that the deal will increase her fiscal 2012 estimate for Canadian Tire earnings by about 7 per cent.
Add it up, and she says that there is a natural fit here that answers any questions about why this deal was struck. As to why now: "The answer provided by management is that after 2 1/2 years of heavy lifting, both the balance sheet and (organization) are well positioned for the deal," Ms. Nattel said in a note.
In its fiscal fourth quarter, Forzani reported record-high earnings, which followed record-high third-quarter earnings that certainly suggested that the company had found its feet recently. Yet, the share price drifted, rising all of 4 per cent over the past 12 months and even looking relatively range-bound over the past two years.
Meanwhile, even though the deal rewards Forzani investors with a hefty premium of about 50 per cent over the stock's closing price on Friday, the offer is less than 5 per cent above Forzani's high in 2007, when the shares hit $25.29.
David Berman