Sports Direct looks likely to make a tidy profit on the 11% stake in House of Fraser that it unexpectedly acquired from retail entrepreneur Sir Tom Hunter last week as a deal was being finalised for the store group to be bought by Chinese conglomerate Sanpower.
Drapers understands that Sanpower is highly likely to exercise pre-emption rights which mean that existing shareholders have to be offered right of refusal ahead of an outside investor. If this turns out to be the case, Sports Direct would have to sell its shares to Sanpower. But Sports Direct, controlled by Mike Ashley, would receive the same price as the other HoF shareholders and Drapers believes that this will be at a significantly higher level than the price at which Hunter sold them in his surprise move last week. Ashley’s purchase is viewed by some observers to have been an influence on Sanpower’s speed in moving ahead with its acquisition of HoF.
Drapers also understands that Sanpower’s purchase price is below the range of £400m-£450m mentioned in press reports. HoF watchers are awaiting full disclosure of the small print of the deal as a source close to the negotiations said that “the devil is in the details here”. It is not known if Sanpower’s purchase price includes the group’s debt and pension deficit. Most observers, however, believe the Chinese deal, brokered by HoF chairman Don McCarthy, makes more sense than HoF’s proposed IPO.
On Friday afternoon, drapersonline.com reported “… Sanpower, controlled by multi-millionaire Yuan Yafei, will be buying 89% of the equity with 11% being retained by a British investor with extensive retail interests.” Ashley, through Sports Direct, has now been confirmed as that investor.
Hunter, who had held his HoF stake since before the financial crisis, is the only one of the store group’s investors not to go along with McCarthy’s Chinese deal. Hunter has done deals with his friend and business associate Ashley before; via his West Coast Capital vehicle, Hunter sold control of the multi-brand chains USC and Cruise to Sports Direct in 2011.
Unconfirmed press reports suggest that Ashley tried to derail the Sanpower bid last week by offering to buy the entire company but his offer was turned down by the other shareholders, who include McCarthy, Icelandic financial institutions Landsbanki and FL, founder of Karen Millen Kevin Stanford, Lloyds Bank and members of the current HoF management team.
Ashley had been linked to a full takeover of HoF as far back as 2012 and the Hunter deal is the latest in an extraordinary series of acquisitions by the retail billionaire.
Since January Ashley has spoken for 6.6% of Debenhams via a shareholding device called a put option. He is known to be looking at supplying sportswear and sports equipment to Debenhams.
Ashley may have wished to hold on to the 11% stake in HoF, which runs 61 stores in the UK and Ireland, as it would have kept him close to Debenhams’ rival as well as bringing him in regular contact to an important operator in China. Nanjing-based Sanpower, which employs 30,000 people, controls 100 companies including China’s oldest and largest department store, Nanjing Xinjiekou. It plans to develop 100 “lifestyle hubs” in China as part of its extensive retail interests.
It seems likely now, however, that due to Sanpower’s pre-emption rights, Sports Direct will take a handsome profit and exit HoF, but with the twists in this story nothing is certain until it is signed.