Mounting speculation that discount chain Sports World, owned by elusive entrepreneur Mike Ashley, was set for a £2 billion float has been met with a curious mix of excitement and scepticism by City analysts and retail insiders.
The 200-plus store chain has cut a swathe through the UK sportswear market with its aggressive discounting strategy, which focuses on selling big-name brands such as Nike and Adidas alongside its own higher-margin brands such as Dunlop Slazenger, as well as surfwear brand No Fear.
The stores may look bargain basement, but sales surged 45% to £905 million for the year to April 24 2005, with profits hitting £74.5m. Since then, in a raft of acquisitions Sports World has swallowed up competitors including Gilesports, Hargreaves Sports and Streetwise Sports, and also snapped up young fashion chain Original Shoe Co.
The result is a hugely competitive UK sportswear market where almost all the product is controlled by Sports World, JJB Sports and the John David Group.
However, the idea that notoriously secretive Ashley would offer himself up for City scrutiny as part of a float has surprised many. The £2bn valuation figure has also raised eyebrows. KBC Peel Hunt analyst Paul Rossington says: "The £2bn price sounds rich. Looking at a 16 times valuation, Sports World would have to be making pre-tax profit of about £180m to justify that price. Ashley has a reputation for devaluing brands. Nike and Adidas seem to be worried about their brand equity in the UK, and given Ashley's potential plans for global growth it's unlikely they'll want him to do the same thing in other territories."
Market consolidation has led to the big three sportswear players reshuffling their stance. While John David Group is moving towards a more fashion-oriented offer and JJB Sports is investing in its "Serious About Sport" campaign, there is less differentiation between Sports World and the latter. The chances are that potential investors could favour a debt free, innovative company such as Ashley's.
However, City insiders say that apart from holding a brief press conference and issuing a statement and photo, Ashley has yet to be seen doing the rounds. Instead, he is leaving it to bankers Merrill Lynch, Citigroup and Credit Suisse, suggesting that raising interest in a float is not at an advanced stage.
But it is clear that Ashley will have to come out of the shadows if he is serious about a float. This means becoming more transparent about his business dealings, which has included building stakes, usually anonymously, in both JJB Sports and JD Sports. His 29% stake in Blacks Leisure Group was also rumoured to be a precursor to merging Sports World with the listed company.
City wisdom says that discounters often receive lower valuations because they are lower margin and more volatile, with a less resilient top line. The relatively poor performance of recently floated businesses such as Debenhams has not helped.
Investec analyst Mark Charnock says: "The City doesn't have a problem with value retailers, but discounters operate in a more speculative way, so the perception is that there's more risk. We don't know what Sports World's assets are, so it's not clear what would be in the offer. To have confidence in someone you have to know them, so Sports World has its work cut out to develop relationships from a standing start. It must also show there is a growth story, and that means it is more likely to impinge on its competitors."
Nevertheless, Ashley's reputation as a retailer is admired throughout the sector, and although speculation suggests he is likely to promote managing director Dave Forsey to chief executive and draft in a high-flying chairman, few believe Ashley will not still be pulling the strings.
KBC Peel Hunt's Rossington believes it would not make sense for Ashley to take a back seat. "Blue-chip investors want to see the whites of the eyes of the people they are dealing with. There are only about half a dozen people at that company who know what's happening."
One sportswear industry insider adds: "He's been an unbelievable success - no other retailer has had the same growth. He has the best own-brand operation in the UK, and is the best at sourcing product. I think he's trying to be less of a rebel to be accepted by the establishment. Forsey is a brilliant number two, but it's still Mike who runs it."
It is thought that Sports World's gross margin for the past six months compared with the previous period has jumped from about 38% to 46%. This could have been achieved though cost cutting, but the company may have taken a less competitive stance recently. This could be a result of Nike and Adidas's rejigged distribution policies and strengthened relationship with Sports World's competitors, or it could signal a more general change of approach.
Whatever the case, it is likely that Ashley's strong retail reputation will override any concerns about his wheeler-dealer approach and lack of corporate transparency.
SPORTS WORLD ESSENTIALS
Portfolio: 200-plus Sports World stores; Lillywhites in London's Piccadilly; 50 Original Shoe Co stores
Brands: Dunlop Slazenger, No Fear and Lonsdale. Also holds the licence for Umbro
Acquired chains rebranded to its fascias in the past 18 months: 66 Hargreaves Sports stores; 32 Streetwise Sports shops; 70 Gilesports stores.