Sports Direct Takes Option on Tesco Shares as Grocer Launches Turnaround

LONDON (The Deal) -- Struggling U.K. food retailer Tesco on Thursday gained an unexpected, and possibly unwanted, ally in its turnaround efforts when Sports Direct International disclosed it had taken an option over a small stake and professed its "belief in Tesco's long-term future."

Sports Direct said it's arranged a put option with Goldman Sachs International over a 0.28% stake. The option will cost it no more than about £43 million ($70.1 million).

The disclosure of the investment comes three days after Tesco, of Cheshunt, announced it had overstated estimated first-half profit by £250 million and drafted in Deloitte LLP and Freshfields Bruckhaus Deringer LLP to investigate what went wrong. It follows a string of profit warnings from Tesco, which was an expansionist, dominant force in retailing for almost two decades, until its fortunes abruptly turned in 2012, prompting it to curtail store openings and cut back its overseas presence.

Standard & Poor's late Wednesday said Tesco's credit rating may be cut to junk. Tesco had net debt of £6.6 billion as of Feb. 22. Its share price has fallen by almost a fifth since Friday's close and the shares were trading down 1.3 pence, at 193.6 pence, by early afternoon in London, equating to a market value of about £15.7 billion.

Sports Direct and its maverick chairman, founder and 62% shareholder Mike Ashley, have had their own run-ins with City investors, most recently over Ashley's bonus scheme.

Sports Direct's Tesco maneuver follows a similar move in January at variety store retailer Debenhams plc following a shock year-end profit warning at that company. Sports Direct switched a Debenhams stake for a put option, and eventually parlayed its exposure into a deal to introduce trial Sports Direct concessions in Debenhams stores.

On Tuesday sector-wide figures from research group Kantar for the week four weeks to Sept. 14 suggested that Tesco same-store sales had fallen by between 6% and 7% in that period, according to Jefferies International Ltd. analysts. Tesco has 28.8% of the U.K. grocery market, where the four leading players are all losing market share to German discount chains Aldi and Lidl.

Tesco earlier this month installed Dave Lewis, a marketing expert from Unilever plc, as CEO, replacing Philip Clarke, who was ousted in July. On Tuesday Lewis convinced incoming CFO Alan Stewart, and his old employer, Marks & Spencer Group plc, to let him start immediately, instead of in December, as planned.

Sports Direct shares were down 5 pence at 655 pence by early afternoon, giving the Newcastle, England company a market value of £3.9 billion.

Read more: http://pipeline.thedeal.com/tdd/ViewArticle.dl?id=100051027847#ixzz3EKwzVP2I

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