Why Mike Ashley's Debenhams bet is no gamble

Ashley's Sports Direct increases its exposure to Debenhams and makes a tidy profit to boot.

by Adam Gale

Lightning may never strike twice, but maverick billionaire Mike Ashley apparently does. Last night his firm Sports Direct sold its 4.6% stake in Debenhams and then immediately increased its exposure by selling a larger put option on the department store's shares - which is exactly what it did in January.    

The 6.1% put option means that Sports Direct increased its interest in Debenhams from 11.2% to 12.7%, but no longer actually owns any equity in it. It also means that the sports retailer has made £2.3m profit on the shares, after buying them only one month ago for £31.5m, alongside an undisclosed premium from the put.

So what's Ashley thinking?

Put options can be seen as a bet on a firm's share price. An undisclosed third party paid Sports Direct a premium for the right to sell it stock at a specified price, likely to be similar to today's market rate. If Debenham's shares go up, the third party won't exercise the option and Sports Direct will walk away with the premium. If, on the other hand, the price drops, then Sports Direct will be obliged to buy the shares at higher-than-market price.

This could be seen, therefore, as Ashley doubling down on his so-far failed bet on Debenhams in January, since when the share price has dropped 22.5%. But what does he really lose if the price drops further? The worst that could happen is that he has to buy Debenhams shares at something similar to the current rate, when he clearly has an interest in the department stores anyway.

Sports Direct opened lucrative full-floor concessions in four Debenhams stores in July, and it's likely Ashley wants more. With this deal, he can influence Debenhams without actually having to own any of its shares, leaving him £33.8m, plus the put premium, to invest elsewhere. Unless Ashley chooses to take another stab at Tesco, this looks like a win-win move.

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