Jim Armitage: Why didn't the Sports Direct share price tumble after House of Fraser swoop?Comments Off on Jim Armitage: Why didn't the Sports Direct share price tumble after House of Fraser swoop?
So many unanswered questions arise from Mike Ashley’s move for House of Fraser, but the biggest is why didn’t the Sports Direct share price tumble?
Surely this deal makes Sports Direct a far riskier prospect than it was yesterday. Why? Because until today’s announcement, we thought Ashley would be cherrypicking a handful of stores from the administrators, which he could easily digest. Now, he is taking on 59 across the UK. That’s 59 huge sites in cities the length and breadth of the country, full of stock and with varying lease commitments.
As of this afternoon, he has the job of negotiating the sale of dozens of the weakest and integrating the rest into the Sports Direct system. That will be a huge distraction for management.
Also, we have no idea what debt Sports Direct takes on in the deal, and have little clarity over HoF’s finances.
Sports Direct says HoF had a “net profit” of £14.7 million last year, but it’s not clear what that includes. Previous accounts say it lost £44 million.
We also have no clue how much Sports Direct will now have to invest in keeping the places going. You can bet it will be numbered in the tens of millions of pounds, though.
The deal just about made sense for Philip Day – one of the canniest retail dealmakers. The owner of brands including Berwin & Berwin, Austin Reed, Jaeger and Jacques Vert could have taken over the manufacturing for HoF’s in-house brands such as Linea. Savings would have been substantial, with HoF currently spending several hundred million pounds a year buying these ranges in.
It’s true that Sports Direct has brands too, like Kangol and Hot Tuna, but they’re for the “yoof” market; they could never form a substantial part of a department store.
Perhaps Ashley plans to alter the stores completely and make them more into sports and youth-leisure emporia. But even if he sticks in his new gyms and a big Sports Direct concession, it’s hard to see how he’ll fill those big stores.
Day seems to have been frozen out of the bidding. His offer last night, made while the business was still solvent, was rejected. This morning, after the administrators were called in, he is said to have offered £100 million. A couple of hours later, the announcement comes out that Ashley has won the day at £90 million.
It all sounds rather like a pre-arranged backroom deal.
Advisers to House of Fraser, the bondholders and the administrators will have had their reasons to go down that cosy route, but Sports Direct shareholders may wish it hadn’t been so.