Dick's Sporting Goods announced an offer to acquire Foot Locker for $2.4 billion, or $24/share — a nearly 90% premium to Foot Locker's Wednesday close. The deal, if completed, would represent the largest strategic move yet by Dick's to consolidate the $140 billion U.S. sports retail market. This note considers recent short interest trends in the acquirer and target ahead of a possible deal announcement.

Foot Locker’s Short Base is Crowded: Short interest in Foot Locker has doubled YTD, reaching over 16% of float — a 52-week high — just as takeover talks surfaced, setting up potential for a mechanical squeeze.

Deal Premium is High, Limited Arbitrage Spread Exists: The proposed $24/share offer from Dick’s represents a 86% premium to the previous close, however the surge in FL share price on Thursday covered nearly all of the premium with shares closing at $23.90.

Merger Arb Flow Could Pressure DKS: Typical merger arb positioning (long target, short acquirer) is expected. Short interest in Dick’s has been stable near 8%, but will likely rise as hedge flows build.

Deal Terms: FL Investors have an unrestricted choice of $24 in cash or 0.1168 shares of DKS. The deal is expected to close by year end.

Following the deal announcement, merger arbitrageurs are expected to put on the typical positions: long Foot Locker, short Dick's. Foot Locker shares surged as much as 83% in Thursday's premarket, leaving a little room for spread compression and suggesting a high level of confidence in deal closure. Short sellers, however, may face a more constrained setup. Foot Locker's short interest has more than doubled YTD, climbing from 8% to over 16% of free float as of May 14, hitting a 52-week high the day talks of the deal were reported. With shares now sharply higher on the deal announcement, there's potential for a mechanical short squeeze as pre-deal shorts scramble to cover.

Short interest in Dick's shares, by contrast, has been rangebound, hovering between 7% and 9% since mid-January. This creates a potentially asymmetric risk: pressure on FL shorts in the near term, and new DKS shorts entering to hedge arbitrage exposure. Short interest metrics have not yet updated post-announcement, but the setup warrants close monitoring. The next week of data may reflect not just merger bets but forced covering as well.

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