It looks like Mike Ashley did want his Debenhams stake after all. After buying a 4.6% stake in the retailer in January, only to sell it again four days later for a tidy £5m profit, Sports Direct has now bought the same stake back, at a much reduced price. Debenhams shares were trading slightly down at £61.90 this morning, nearly 30% lower than their January peak of £85.65.
Besides admiring another one of Ashley’s zany risks gone right, investors might pause to consider his other motives. Sports Direct already has an interest in Debenhams, through a put option that it sold in January (the same day it sold the original 4.6%). An undisclosed financial partner paid Sports Direct an undisclosed premium (this is all very hush hush, clearly) for the right to sell it a 6.6% stake in Debenhams at an agreed share price, likely to be roughly where it was back then.
As Debenhams shares are well down from that level and the put option will expire next year, the chances are that Sports Direct will be obliged to cough up and acquire a 6.6% stake in the department store at the higher price. The result, of course, is that it will probably end up with over 11%.
Does this mean the recent purchase is an early move towards buying a controlling stake in Debenhams? Possibly, or maybe it’s designed just to increase Ashley’s influence there. Since the put option in January, Sports Direct has been trialling concessions inside Debenhams stores, where it rents space to sell its own wares. This could be leverage to expand that or similar programmes.
Alternatively, it could be a straight bet. The put option already constituted a so-far unsuccessful gamble that Debenhams' share price would not fall over the year. By buying more stock, Ashley is putting even more behind the shares rising.
Indeed, even if the price does drop, this week’s £33m investment and the put option itself won’t be loss-making so long as Debenhams and its shares perform well over the long term. However you look at it, Sports Direct is backing Debenhams.
Then again, Ashley has had some odd investing habits of late, particularly when it comes to declining retailers. He sold another put option for Tesco this week, and also spent £890,000 expanding his share in Rangers football club from 3.69% to 8.92% – a month after he declined the option as a current shareholder to buy more equity in the firm. What he’s doing with Debenhams, then, could be anyone’s guess, which may of course be exactly what Ashley wants.