Sports Direct takes put option on Tesco shares - UPDATE
Retailer Sports Direct International revealed it has entered into a put option on 23m Tesco shares, 0.28% of the total, which it said reflected its belief in the under-fire company.
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Sports Direct, run by canny founder Mike Ashley, wrote a similar put option over shares in Debenhams in January, which was seen as an aggressive move to put pressure on the beleagured Debenham's board.
But this time the company explained that its investment, via investment bank Goldman Sachs, "reflects Sports Direct's growing relationship with Tesco and belief in Tesco's long-term future".
Tesco is currently reeling after admitting to a £250m overstatement of its first half profits, with MPs calling for management to be brought before parliament.
A put option gives the holder the right, but not the obligation, to sell the underlying security at a defined price.
Accendo analyst Mike van Dulken said Ashley was "up to his old tricks again", explaining that the put option was "essentially him placing a bullish bet on the TSCO share price recovering from its recent 11-year lows".
When Sports Direct took a 4.6% stake in Debenham's, Ashley then swapped this for a put option, which was seen as wanting exposure to the struggling company but only if the shares dip, putting pressure on Debenhams' management team.
Van Dulken added, with tongue likely in cheek, that with Debenham's shares down over 25% from their contract date and January highs, "could this contract now be so out of the money that its needs hedging via a bet on a TSCO recovery?"
To the extent that the market price of Tesco's ordinary shares is less than an agreed exercise price on expiry of the put, Sports Direct would then have the right to elect whether to settle the option by acquiring ordinary shares in Tesco at the exercise price or by paying the cash settlement value of option.
In other words, the contract has seen Ashley, in return for a premium, write a contract that gives Goldman Sachs the right to sell him Sports Direct Tesco shares at an agreed price in the future.
Sports Direct's maximum exposure under the put option is limited to approximately £43m, it said.
Independent analyst Nick Bubb said Ashley, "has tried to call the bottom in the Tesco share price" but added that "with mighty Blackrock selling, it clearly takes two to make a market".
He added: "We suspect that most Sports Direct shareholders would probably prefer Mike Ashley to stick to what he’s good at...and not go round punting in Tesco shares.
"Sports Direct shares have, in fact, not performed well recently, although the same could also be said of the Debenhams share price."
Shares in Tesco were down 0.5% to 194p at 09:41 on Thursday, while Sports Direct was down 0.2% to 659p.