How Billionaire Mike Ashley Weirdly Missed His Own Party

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(Bloomberg Gadfly) -- Billionaire Mike Ashley likes to get his money's worth.

Just look at his ability to pick up shares in rivals on the cheap, as he did with Game Digital Plc in July.

The trouble is, he hasn't been able to repeat the trick with Sports Direct International Plc, the company he founded and in which he has a stake of about 61 percent. Gadfly has long argued that he should take the company private to save himself the headache from battles with minority investors on corporate governance. But he has now missed the most opportune moment to strike, and he's stuck with them. 

Sports Direct sank into the doldrums in 2016. A newspaper investigation into its working practices, and subsequent inquiry from lawmakers, hammered sales. Shoppers shunning its cut-price tracksuits and sneakers, together with a failure to hedge its currency exposure, prompted a series of profit warnings.

If Ashley had bought the stock he did not own in Sports Direct in July last year, when the shares hit a five year low of 252.2 pence, it would have cost him about 812 million pounds ($1.1 billion), assuming a 20 percent takeover premium. At the time, borrowings were also low. Net debt was just 99.6 million pounds at April 2016.

Fast forward eighteen months and the company looks in better shape. And so does its share price.

The company said Thursday that, although statutory pre-tax profit fell by two thirds in the first half to 45.8 million pounds, the year-earlier period included the profit on a disposal of shares in JD Sports Fashion Plc. Underlying Ebitda was up 7.4 percent to 156.1 million pounds. The company also reiterated its guidance for full-year underlying Ebitda to be up between 5 percent and 15 percent.

Sports Direct's stock buyback program has reduced the number of shares outstanding. But even with the 10 percent fall in the price on Thursday, it is still up by almost 40 percent since last year's nadir. So, with the same 20 percent premium, the cost of acquiring the shares Ashley does not own would increase to nearly 900 million pounds.

Borrowings have also ballooned, with net debt at 471.7 million pounds at Oct. 29, so crimping the company's flexibility. And of course, Ashley's coffers could be swelled if he manages to sell Newcastle United, so perhaps the higher price may not be such a burden in the end. 

And all is not rosy in the Sports Direct garden. U.K. sports sales fell 1.4 percent in the six months to Oct. 29. The company said this reflected fewer online promotions and store closures as it takes its offering upmarket. But, as Gadfly has argued, the British high street faces some tough conditions, so there is no guarantee trading will improve any time soon.

Higher stock levels, losses from an embryonic U.S. business and a 1.8 percentage point fall in the group gross margin to 38.6 percent are all worrying signs. And a plan to overhaul its shops won't come cheap, with 99.9 million pounds of capital expenditure in the first six months of the year. Meanwhile, poor corporate governance remains a nagging concern. More than 70 percent of shareholders voted down a proposal to pay Ashley's brother, John, 11 million pounds for work he carried out for the company.

But even with Thursday's slide, the shares are still at a premium to JD Sports. 

That's good news for minority shareholders, less so for a bargain loving billionaire.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

©2017 Bloomberg L.P.

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