What happened

Gun enthusiasts might call it “two good tastes that taste good together”. Ammunition maker Ammunition (NASDAQ: POWW) intends to acquire GunBroker.com – and ammunition stock is exploding on the news.

So what

At 11:50 a.m. EST Thursday, Ammo shares rose 20.9% in response to the company’s announcement that it could buy the main online gun market GunBroker.com. As advised by Ammo, he signed a “non-binding letter of intent” to acquire GunBroker.com from its parent company, IA Tech LLC.

Completion of the purchase will depend on what Ammo finds after conducting due diligence on its proposed price, as well as negotiating a “final deal” to purchase, obtaining regulatory approval and … collecting enough money to buy the company. (After all, at the last report, the ammo only had about $ 3 million in the bank.)

Assuming the deal goes through, however, Ammo will pay “approximately” $ 240 million to acquire GunBroker.com and close the transaction “no later than March 31, 2021”.

Image source: Getty Images.

Now what

Now, is this a good deal for Ammo and its shareholders? Is this a good reason to buy stocks?

Ammo describes GunBroker.com as “the world’s largest online auction market for firearms, hunting, shooting and related products”, with 6 million registered users, $ 60 million in revenue annual earnings, $ 40 million in earnings before interest, taxes, depreciation and amortization (EBITDA), and “positive net income and strong free cash flow” to boot.

So, at the listed purchase price, Ammo will pay four times the sales – which makes it look like a very good deal compared to Ammo’s price / sales ratio of 19.8. Additionally, GunBroker.com is said to be profitable (while Ammo is not) and valued at around six times EBITDA.

Assuming Ammo can close the deal for the price listed, this looks like a really nice acquisition for the company, to me.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.