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Dick’s–Foot Locker Merger Likely Faces Antitrust Hurdles: Market Overlap, Labor Risks, and Brand Control
Executive Summary
On May 15, 2025, Dick’s Sporting Goods (NYSE: DKS) announced its intention to acquire Foot Locker (NYSE: FL) in a cash-or-stock transaction valued at approximately $2.4bn. Foot Locker shareholders may elect to receive either $24.00 in cash or 0.1168 shares of Dick’s stock per share, with no proration limits–current spread as of 5/24/2025 $23.71→$24, or 1.22%.
While the market has reacted positively, and the spread remains tight, I believe this deal–as currently structured–faces meaningful regulatory headwinds that many in the market aren’t considering. The merger is highly horizontal, combining two of the most regionally overlapped athletic retailers in the U.S. The deal is likely to trigger Herfindahl-Hirschman Index (HHI) spikes in numerous local markets, raise supplier leverage risks (Nike, Adidas), and invite labor market scrutiny due to likely store closures.
Although Lina Khan is no longer FTC Chair, her tenure institutionalized scrutiny of labor monopsony (one company becomes the main employer, so it can lower wages or reduce worker options, because there’s little competition for labor) and regional market concentration, and current agency policy remains consistent. At present, no Second Request has been issued, and the deal is expected to close in 2H 2025. But given the overlap and precedent, I believe the most likely outcome is conditional approval with required store divestitures, admittedly, some bumps ahead for Dick’s and Foot Locker prior to conditional approval.
As a merger arbitrageur, my current strategy is to wait for the regulatory dust to settle. If the FTC issues a Second Request or initially pushes back on the deal and the spread widens meaningfully, I’ll re-engage once the divestiture contours and probability-weighted upside improve.
Deal Structure Overview
- Announcement Date: May 15, 2025
- Consideration: $24.00 cash or 0.1168 DKS shares per FL share (shareholder election; no cap)
- Total Deal Value: ~$2.4bn
- Financing: Combination of cash-on-hand and committed bridge financing from Goldman Sachs
- Expected Close: 2H 2025
- Termination Fees:
- Foot Locker Break Fee: $59.5mn
- Dick’s Reverse Termination Fee: $95.5mn (including for regulatory failure)
- Shareholder Vote: Required (Foot Locker); no public opposition as of now, shareholders likely to approve
Regulatory Framework & HHI Thresholds
▸ Clayton Act, Section 7
Prohibits mergers that may “substantially lessen competition…in any line of commerce…in any section of the country.”
▸ HHI Guidelines:
- HHI > 2,500 = Highly concentrated market
- Post-merger increase > 200 points = Presumption of anticompetitive harm
Application to DKS–FL:
The FTC will analyze overlap market-by-market, especially by Metropolitan Statistical Area (MSA) and zip-code-level trade area.
In suburban and mall-heavy regions, many markets likely exceed 2,500 pre-merger–and combining Dick’s and Foot Locker will likely spike HHI > 200 points, triggering the presumption of illegality under DOJ/FTC guidelines.
Core Antitrust Concerns
1. Horizontal Concentration
- Merging two direct competitors in footwear and athletic apparel, often with stores in the same shopping centers
- Precedent: FTC v. Staples–Office Depot (2016)–Blocked for local overlap despite national online competition–speaks to FTC’s hard focus on local-level overlap
2. Supplier Channel Power
- Combined entity would be the dominant distributor of Nike, Adidas, Under Armour in physical retail
- Smaller shops could face squeezed access or worse wholesale terms
- Precedent: Sysco–US Foods (2015)–Blocked due to supply chain control risk
3. Labor Market Scrutiny
- Store closures = job losses→due to shutting down redundant stores in similar/same locations
- FTC increasingly evaluates impact on retail employment competition, even post-Khan
4. Soft Vertical Leverage
- Not a vertical merger, but may give Dick’s–FL undue buyer power over supplier strategy (e.g., launch priority, discount pressure)
Regulatory Status (as of May 24, 2025)
- Second Request Issued? → No (but likely)
- FTC Commentary or Delay? → None yet disclosed, still early
- Expected Close: 2H 2025, pending shareholder + regulatory approvals (this being the main concern)
- Divestiture Requirements? → None announced yet, but highly likely given store overlap
Primary Merger Arbitrage Desk Considerations
| Factor | Status/Consideration |
| Regulatory Risk | High (horizontal + labor + channel power) |
| Second Request? | Not yet, but expected base case |
| Financing Certainty | High–Goldman Sachs committed bridge loan in place |
| Divestiture Need | High probability (around 50–150 stores across MSAs) |
| Shareholder Vote Risk | Low for now–Foot Locker vote required, likely to go with the flow given premium paid for shares pre-merger announcement; no activist opposition known |
| Timeline Risk | Medium–Second Request could push close to early 2026 |
| Spread Compression? | Likely limited (following forecasted second request) until FTC signals remedy structure or timeline clarity |
| Structuring Risk | Low–shareholders can elect for cash or DKS stock upon successful deal close, no cap involved. |
| Upside Entry Point? | Spread widening after Second Request may offer better risk-adjusted long FL entry –however, at current levels, pre-Second Request levels, tight, unattractive spread given my objective, perceived looming regulatory risk(s). |
Conclusion
The Dick’s–Foot Locker merger is a strategically logical but antitrust-sensitive deal. The horizontal overlap in key local markets, supplier leverage implications, and labor force consolidation risks make unconditional, straightforward approval highly unlikely.
With no Second Request yet issued (it’s admittedly still early on in the process) and the deal expected to close in 2H 2025, I remain in “wait-and-watch” mode. A spread blowout on regulatory news may present the better entry. Until then, I’m on the sidelines.
Regulatory Event Timeline: DKS–FL Merger (as of May 24, 2025)
| Event | Estimated Date / Status | Description / Arbitrage Implication |
| Deal Announced | May 15, 2025 | Deal officially announced; $24/share cash or 0.1168 DKS/share. Spread started tight, remains tight. |
| HSR Filing Submitted | Likely mid-late May 2025 (not publicly disclosed) | Parties must file pre-merger notification under the Hart-Scott-Rodino Act. Start of FTC review clock. |
| Initial Waiting Period Expiration | Mid-June 2025 (30 days post-HSR) | Unless extended or a Second Request is issued, deal could proceed. Most likely scenario: FTC issues Second Request before this date. |
| Potential Second Request Issued | Expected late May to early June 2025 (base case) | Could significantly delay deal and widen spread. Key catalyst for strategic, calculated arb entry. |
| Substantial Compliance with Second Request | ~3–4 months after issuance (Aug–Sep 2025 if issued in June) | FTC reviews data after both parties fully comply. Starts final 30-day review window. |
| FTC Decision (Clear / Settle / Sue) | Base case: Sep–Oct 2025 | Most likely outcome: conditional approval with store divestitures. Less likely but possible: full block/lawsuit. |
| Divestiture Plan Announced (if required) | Fall 2025 (if remedies negotiated) | Dick’s may announce agreements to sell stores in overlapping MSAs to satisfy FTC. Market will assess credibility of buyers. |
| Foot Locker Shareholder Vote | Late Q3 or early Q4 2025 | No opposition as of now. Watch for activist entry or ISS/Glass Lewis influence, but again, unlikely given that FL is hardly a growing business and the premium offered by DKS is sizable. |
| Regulatory Clearance | Q4 2025 | Could slip into Q1 2026 if Second Request timeline is drawn out or remedies are disputed. |
| Deal Close (Best Case) | Late 2025 | Only if no Second Request or fast divestiture deal. |
| Deal Close (Base Case) | Q1 2026 | Assumes Second Request, required divestitures, and positive FL shareholder vote. |
| Deal Collapse (Bear Case) | Any time post-Fall 2025 | Only if FTC sues and parties walk (triggering reverse termination fee–RTF: $95.5mn). Bear case probability currently ~20–25%. |
Arbitrage Takeaways Based on Timeline
| Scenario | Spread Action | Arbitrage Move |
| No Second Request by mid-June | Spread may continue compressing | Re-evaluate: FTC clearance looks smoother than expected–would probably be out of luck at this point and need to move on, as spread would likely become far too narrow, unless had access to leverage |
| Second Request issued (late May–early June) | Spread widens | Best time to initiate small long FL–then dig into deal dynamics and prospective + eventually proposed remedies and see if sensible enough to allow deal to proceed |
| Divestiture plan announced (Q3/Q4) | Spread begins to tighten if buyers are credible | Monitor buyer identities, FTC acceptance |
| Continued FTC litigation post-Second Request remedies (low-probability tail) | Spread blows out | Likely leads to walk → avoid or reverse position–ensure no White Knights, however, and keep tabs on any other upcoming FTC developments with the prospective deal–DKS + FL might give it another try |
Merger Memo: Dick’s Sporting Goods Prospective Acquisition of Foot Locker
As of: May 24, 2025
Deal Type: Horizontal Retail Consolidation
Structure: Cash or Stock Election | $24.00 per FL share or 0.1168 DKS shares (no proration cap–FL shareholders will get exactly what they want under these two options)
Transaction Overview
-
- Announced: May 15, 2025
- Total Value: ~$2.4bn
- Financing: Cash + committed bridge loan (Goldman Sachs)
- Expected Close: 2H 2025
- Termination Fees: $59.5mn (FL), $95.5mn (DKS reverse)–The termination fees in the Dick’s–Foot Locker deal–$59.5mn for Foot Locker and $95.5mn for Dick’s–are objectively high enough to signal that both companies are fully committed to closing the transaction. Foot Locker’s fee represents ~2.5% of the deal value, aligning with typical break fee norms, while Dick’s reverse termination fee is ~4.0%, notably high and inclusive of regulatory failure. This structure sends a clear message: Dick’s is prepared to bear significant financial risk to push the deal through, including working proactively with the FTC to negotiate remedies if needed. These fees materially discourage walkaways and demonstrate that both parties are operating in good faith with the intent to close.
- Shareholder Approval: Required (Foot Locker only); no known opposition
- Current Spread: Tight (<$0.30); not attractive for entry as of now
Regulatory Risk Assessment
Base Case: Conditional approval with store divestitures
Primary Regulatory Concerns:
-
- Horizontal Market Overlap: Significant MSA-level concentration in malls/suburban centers
- HHI Impact: Many markets >2,500; expected increase >200 points → presumption of illegality under DOJ/FTC
- Supplier Channel Power: Potential gatekeeping over Nike/Adidas distribution–It’s a big deal because the combined Dick’s–Foot Locker could control too much of Nike’s and Adidas’ shelf space in stores. That means they could pressure brands for better deals, get exclusive products, and make it harder for smaller retailers to compete. Regulators worry this kind of gatekeeping power hurts fair competition–even if it’s not a full monopoly.
- Labor Market Scrutiny: Redundant + underperforming store closures → job losses → FTC sensitivity
- Remedy Likelihood: High (around 50–150 store divestitures across key regions)
- Second Request: Not yet issued, but expected by early mid-t0-late 2025
Catalyst Timeline (Regulatory Events)
| Event | Est. Timing |
| HSR Filing Expiry | ~June 15, 2025 |
| Potential Second Request | Late May–June |
| Substantial Compliance–DKS + FL fully respond to agency request(s) for more information–DKS + FL essentially handing over everything regulators have asked for, leaving it to the regulators to decide | Aug–Sep 2025 |
| FTC Decision / Divestiture Talks | Sep–Oct 2025 |
| Deal Close (Base Case) | Q1 2026 |
Arb Strategy & Positioning
- Current View: Too early; spread not compensating for likely regulatory concerns
- Entry Trigger: Spread widening on Second Request or formal FTC inquiry
- Best Entry Setup: Long FL if spread >$1.00 and deal drifts into Q1 2026
- IRR Matrix (Entry at $1.00 spread, or FL at $23):
- Dec 2025 close: ~7.6%
- Mar 2026 close: ~5.3%
- Jun 2026 close: ~4.0%
- Bear Case Probability: 20–25% (FTC sues; deal fails; reverse termination fee–RTF triggered)
Legal Framework Assessment
Should the FTC approve this deal under the law?
→ Yes—but with conditions. The FTC would be justified in approving the deal with divestitures under the Clayton Act framework.
Governing Statute:
Clayton Act, Section 7
Bars mergers where the effect “may be substantially to lessen competition… in any section of the country.”
Objective Legal Application:
- This is a horizontal merger, but the relevant market is local retail athletic footwear/apparel, not national.
- In many MSAs, the combination would exceed HHI guidelines (post-merger >2,500 with >200-point increase).
- However, these overlaps are highly localized and easily remedied through store divestitures in affected ZIP codes.
- There is no credible national-level market foreclosure or monopsony effect on labor or consumers.
Precedent Reinforcement:
- FTC v. Staples–Essendant (2019):Cleared with conditions; FTC required firewalls to protect rival access to competitively sensitive information. No divestitures or block.
- Albertsons–Safeway (2015): required >150 store divestitures across local grocery markets to cure HHI issues–same legal structure applies here.
Conclusion: Under the Clayton Act, the merger does not pose systemic anticompetitive risk, that is, if divestitures are offered in highly concentrated MSAs–the FTC is legally sound to approve it with remedies. A full block would likely not survive a court challenge.
Regulatory Approval Outlook – Dick’s Sporting Goods–Foot Locker
Will the FTC ultimately approve this deal?
→ Yes—with targeted divestitures.
Contextual Regulatory Factors:
- This is a classic horizontal merger between two athletic retailers with overlapping store footprints in many suburban/mall-heavy markets.
- However, the market is fragmented overall (Amazon, Nike DTC, department stores, off-price retailers), weakening any national market power argument.
- FTC precedent (e.g., Albertsons–Safeway, Walgreens–Rite Aid) shows that store divestitures in specific ZIP codes or MSAs have routinely been used to cure horizontal overlap without blocking the entire deal.
- Labor impact (store closures, job loss) may trigger public scrutiny, but the current FTC posture following former Chair Khan has softened slightly post-2024 election and is less aggressively blocking deals without strong legal footing.
Additional Considerations:
- Dick’s and Foot Locker both have the resources and incentive to negotiate divestitures, and the number of problematic markets is likely manageable (~50–150 stores).
- There is no third-party supplier (e.g., Nike) on record opposing the deal–if Nike were vocally against, the dynamics could shift.
Approval Probability (as of May 2025):
80–85% under specific base case: deal clears with somewhere around 50–150 store divestitures.
Risk of FTC litigation/block is low unless merger parties fail to engage proactively on remedies, but they are incentivized to do so given the aforementioned deal-break fees.
Conclusion
The DKS–FL merger is strategically sound but structurally exposed. Regulatory friction is likely, and approval will almost certainly require store divestitures. Spread is currently too tight given these risks. I am standing down for now, and will re-evaluate on FTC action or news of divestiture negotiations. Strong setup could emerge late Q2 or Q3 2025, but I am never in the spirit of chasing spreads and “certainty.”
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.
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