Why has Mike Ashley's Sport Direct bet £43m on Tesco?

The maverick sportswear tycoon has taken a punt on the beleaguered supermarket, but it's not clear it'll pay off yet.

by Rachel Savage
Last Updated: 08 Oct 2014

Sports Direct, the sportswear retailer majority-owned by maverick tycoon Mike Ashley, has taken a stake in Tesco. It’s the latest twist in a tortuous week for the troubled supermarket, which suspended four executives on Monday after it discovered first half profits had been overstated by £250m.

The FTSE 100 company has taken out a put option on 23 million Tesco shares with vampire squid Goldman Sachs, equivalent to a 0.28% stake, it said in a stock market filing on Thursday. If the share price falls below the ‘exercise price’, Sports Direct (aka Ashley) will have to buy them at that pre-agreed price or pay the difference in cash.

The retailer’s ‘maximum exposure’ (i.e. what it could lose under the deal) is around £43m, it said. On the other hand, if the price rises, it pockets the premium.

‘This investment reflects Sports Direct's growing relationship with Tesco and belief in Tesco's long-term future,’ it said.

Sports Direct had been in talks with Tesco over taking over space in some of its mega stores, according to Bloomberg, which had been undergoing refurbishment under ex-chief executive Philip Clarke to make way for Giraffe restaurants and Harris + Hoole cafes in an attempt to make them more of a destination. If the sportswear giant is already committed to any such deal, it has a vested interest in the supermarket’s turnaround.

It’s also not the first bet Newcastle United owner Ashley has made on a declining retailer this year (alongside selling off more of his majority stake in Sports Direct and pulling out of a staff bonus scheme that originally looked like it was designed to finally get him paid). His company took out a 6.6% put option on Debenhams in January, after selling a straightforward 4.6% stake it had bought only a few days before.

It seems like a favoured tactic of Ashley’s then, although it remains to be seen whether he’s buying up shares to get leverage in companies, get even richer quick or both.

For new Tesco boss Dave Lewis, it’s yet another unwelcome distraction from getting the house in order so he can attend to the equally pressing task of turning around the company’s falling sales. But parachuting new finance chief Alan Stewart in from Marks and Spencer three months early on Tuesday didn’t stop Blackstone, the supermarket’s third largest shareholder, from selling off a fifth of its 5% stake.

Add to that yet another embarrassing revelation yesterday: that former finance boss Laurie McElwee, who left last week, hadn’t done any work since resigning in April. That looked bad for McElwee, who reportedly applied pressure on his ex-employer to reveal the truth – that Clarke had set up his own finance committee to report to him, without McElwee.

For Lewis, at least it means he has more reasons to blame his predecessor for any other disasters awaiting Tesco. But it’s a sign he has an even bigger mess to clean up.

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