Sports Direct founder Mike Ashley is likely to be the driving force behind the deal, which is not his first of this kind: earlier this year, he made a near-identical bet that shares in Debenhams might rise.
Without getting into the technicalities of Sports Directs options agreement with Goldman Sachs, this is how the deal, which covers 23m Tesco shares, will work.
If Tescos share price falls below a certain level, known as the exercise price, then Sports Direct will have to pay Goldman the difference between the Tesco share price at the time of expiry and the options exercise price.
On the other hand, if Tescos share price rises above the exercise price, then Goldman will pay Sports Direct the difference between the exercise price and Tescos share price at the time the options expire.
Sports Direct says its maximum liability under the deal is 43m, once the premium it has received from Goldman Sachs is discounted. This suggests to me that the exercise price is in the region of 200p, but the firm hasnt disclosed this.
Is Tesco a buy?
Although Mike Ashleys belief in Tescos turnaround potential might be a positive sign, I wouldnt buy Tesco shares purely on the basis of Mr Ashleys latest punt.
There are several reasons for this:
1. We dont know the exercise price or expiry date of the options. We wont necessarily know when the options are exercised, either this could be a very short-term trade, or a longer deal.
2. We dont necessarily know about any planned business deals between Sports Direct and Tesco. Todays announcement mentioned Sports Directs growing relationship with Tesco and belief in Tescos long-term future, but this could mean almost anything.
3. Sports Direct or Mike Ashley might own shares in Tesco. Such a shareholding would not be large enough to require public disclosure, but todays option agreement could be an attempt to salvage a profit from a loss-making position.
Ultimately, if you are considering buying shares in Tesco, then Mike Ashleys decision to back the firm might be a useful piece of supporting evidence but I wouldnt buy Tesco shares on todays news alone.
Indeed, impulse buying shares is unlikely to allow you to outperform the wider market and goes against the seven simple steps for investing described in “How You Could Retire Seriously Rich“, the latest wealth report from the Motley Fool.
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Both Roland and The Motley Fool own shares in Tesco.