On Friday, Sports Direct announced that it had entered into a new put option deal relating to a potential 10.5% stake in Debenhams. Put simply, if Debenhams share price falls below a certain level, Sports Direct will be required to purchase a 10.5% stake in Debenhams.
If Debenhams share price rises, Sports Direct will receive a one-off premium payment from the counterparty in the options deal, Goldman Sachs.
This is an unusual deal but Sports Direct has form.
16.6% interest in Debenhams
Last year, Sports Direct bought and sold shares accounting for 9.2% of Debenhams, and entered into two option deals giving the firm a potential interest in around 12% of the retailer.
Fridays announcement also revealed that one of the firms previous option deals has now ended, but one is still active.
This means that Sports Directs exposure to Debenhams is worth 131m, and is equivalent to owning a 16.6% stake in the firm.
Buy or sell signal?
If you believe that Mr Ashley is a smart investor whose insights are worth following, then does this new deal suggest you should buy or sell Debenhams shares?
In my view, this deal suggests that Mike Ashley believes that sooner or later, Debenhams will make a strong recovery otherwise why would he risk being lumbered with such a large stake?
Debenhams certainly looks cheap, trading on a 2015 forecast P/E of 10, and a prospective yield of 4.6%. I was also encouraged by the firms recent trading update, which suggested to me that Debenhams turnaround is going well.
What about Sports Direct?
Unlike Debenhams, Sports Direct doesnt look cheap but it does seem to have terrific momentum. The firms shares are up 85% in two years and earnings per share are expected to rise by 23% this year.
My main concern is the way that Mr Ashleys 52% shareholding appears to enable him to use Sports Direct as his personal investment vehicle: last year, he also entered into a similar options deal regarding a 43m stake in Tesco.
This, coupled with the lack of a dividend, puts me off owning shares in Sports Direct but your view may differ.
Indeed, if youd invested in Sports Direct five years ago, youd be sitting on a 650% profit today. In contrast, Debenhams investors are up by just 13%, plus dividends, over the same period.
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