Mike Ashley's Sports Direct International (SPD) has surprised retail sector watchers by spending approximately £45 million on a 4.63% stake in struggling department store Debenhams (DEB). Shares in the sports retail powerhouse shed 8p to 748p on concerns the holding could prove a distraction, while friendless Debenhams enjoys a near-5% bounce to 85.5p.
In a brief statement issued today, the UK's biggest sports retailer by sales and operating profit announces it has bought 56.8 million shares in the High Street giant, still reeling from a severe New Year's Eve profit warning and the resignation (2 Jan) of finance director Simon Herrick.
Having taken Debenhams' under-fire CEO Michael Sharp and the rest of the board by surprise in dipping into the market, Dunlop-to-Everlast brand owner Sports Direct insists it intends to be 'a supportive shareholder'. Moreover, billionaire Newcastle United owner Ashley, who took Sports Direct public in 2007 at 300p, wants to examine options 'at an operational level to work together with Debenhams to create value in the interests of both Sports Direct's and Debenhams' shareholders.'
Freddie George, retail analyst at Cantor Fitzgerald, says the news implies Sports Direct, thought to have looked carefully at buying Debenhams' thriving department store rival and New Year IPO candidate House of Fraser, 'is potentially considering splitting the fashion assortment from the sports ranges in its stores over the medium term'.
He doesn't believe investors should read too much into this stake-building, as expansionist FTSE 100 newcomer Sports Direct has form in buying stakes in other retailers 'not always with great success'. These have included youth fashion JD Sports Fashion (JD.), still struggling to digest its acquisition of outdoors retailer Blacks, as well as failed former sporting goods rival JJB Sports. Ashley's outfit cherry-picked 20 JJB Sports stores from the administrators (1 Oct '12) and has made hay aplenty following its erstwhile competitors exit from the market.
Cantor is sticking with its 'hold' rating and 680p price target for Sports Direct, arguing 'this acquisition provides a further distraction alongside all other recent investments and broadly increases Sports Direct's net debt to circa £160 million'. A seller of Debenhams with a 70p price target, the broker doesn't consider the retailer, whose Christmas trade was hit by poor clothing sales and widespread discounting across the sector, is 'in play' as a bid target yet.