Mike Ashley, the maverick retailer who founded and controls Sports Direct, may be going stateside. He should really stay at home.
Sports Direct International Plc, in which Ashley has a 61 percent stake, is in talks to acquire U.S. sporting goods retailer Finish Line Inc., according to the New York Post. The company didn't respond to calls from Gadfly seeking comment.
It's easy to see why Ashley may be looking across the Atlantic. The U.S. is a huge market, and sportswear companies, from Foot Locker Inc. to Nike Inc. to Finish Line itself have all stumbled recently. The British billionaire is opportunistic and likes a bargain, and Finish Line shares are down 38 percent this year. What's more, as more consumers shop online and mall traffic falls, the sector looks set for a shake-out. By owning Finish Line, Ashley would have a seat at the table.
But he would be better served using Sports Direct's management resources, and money, to help the core chain achieve its goal of becoming the "Selfridges of sport." The company's shares rose about 1 percent on Friday. Perhaps investors think he's going to stick with his domestic plan rather than go after an American dream.
Finish Line has a market capitalization of $469 million. With a 30 percent premium, that would put the theoretical take-out price at just over $600 million. The purchase is far from a bolt on, even with Ashley having an economic interest in Finish Line of 29.6 percent.
Sports Direct has a strong balance sheet, but net debt is creeping up. At the end of April, Sports Direct had net debt of 182.1 million pounds ($243.8 million), up from 99.7 million pounds in the year earlier. That's even after net proceeds of 165.5 million pounds from selling some of the company's investments. It's is also investing heavily in its U.K. store base, spending 317 million pounds on freehold properties in the year to April 2017, as well as buying back shares.
That doesn't leave a huge amount of financial headroom for a big purchase, let alone one that might need more investment pumped in after it is acquired.
Ashley is a shrewd operator, and there's often a hidden logic in some actions that appeared random, such as his involvement in the Agent Provocateur buyout and his stake in Game Digital Plc. But some of his international forays haven't worked out so well. An Austrian venture in 2013 was the primary factor in last year's 58.5 million-pound write down. Taking on Finish Line, and its more than 500 stores, would be a significant distraction for Ashley and his management team.
After a terrible two years, Ashley looks to be getting Sports Direct back on track.
The shares are up 37 percent since the company announced annual results in July, when it said it aimed to increase underlying earnings before interest, tax, depreciation and amortization by between 5 and 15 percent this year.
The shares trade on a forward price earnings ratio of 23 times, compared with about 13 times for each of high street stalwarts Next Plc and Marks and Spencer Group Plc.
Investors are clearly betting that Ashley will be able to turn things round. He shouldn't do anything to change their minds.
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