Mike Ashley, the Sports Direct tycoon, has taken a bet that Debenhams’ share price will rally.
The sportswear chain stated that it had agreed on what is called a put-option with Goldman Sachs over a stake of 10.5% in Debenhams. This deal is a replacement for the agreement which covers a 6.6% holding which was announced during last year.
This is Mike Ashley’s latest toss of the dice. He sold a 2.6% share, to the value of £117m, in the company which was founded by him.
This complex financial method implies that should the share price of Debenhams be below the agreed price of the exercise upon expiry of the contract, Sports Direct may have to purchase the stake, amounting to 128.9m shares, at the given price. In the event that the price goes beyond the exercise price, Sports Direct will receive the premium, but will have no other obligations. It has also set up this type of deal over Tesco’s shares.
The chain said its overall exposure under this new put-option was around £85m. It already holds around £46m to cover an alternate put-option related to a 6.1% share in Debenhams, which it entered during November. These investments are representative of a 16.6% interest in the shares of the department store chain.
The purchase of put-options is a method used to gain a huge chunk in a company without having to tie up capital.
Sports Direct have stated that they have no intention of purchasing Debenhams. Both Tesco and Debenhams have recently come to an agreement with Sports Direct to place outlets in parts of their spare space.