Sports Direct Ltd: The Next Chapter in the Newcastle United Takeover?

Thanks to some of you on Twitter, I was made aware of a filing submitted this morning by ‘Sports Direct International PLC’ at Companies House. This filing concerns ‘the authority to purchase own shares out of capital’. As some have pointed out, the document will be ‘processed within the next 5 days’, and is not yet available. However, the contents of previous filings on share buyback haven’t been made available after the five-day clearing period. I have no reason to believe this time will be any different, so will not await a document I will never get to see. Instead, I have decided to infer from the purpose of the filing, while conducting research on Mike Ashley’s business history, to analyse what this development means for the Newcastle United takeover.  

The Law on Share buyback:

To frame my analysis, I’ll begin by explaining the law around a company buying back its own shares. Yearly, share buy backs are capped at £15k or 5% of a company’s value, whichever is lowest. In the case of Sports Direct, this will be 15k worth of shares per year. This cap can only be increased if the majority of shareholders vote to do so, followed by a filing at Companies House.

The History of Share buyback at Sports Direct International PLC:

Now, I will look at how Sports Direct have purchased their own shares in the past, as this will give us an indication of how they’re likely to do so in the future. Throughout, I will make references to the Sports Direct share price. The price is an influencing factor in Ashley’s decision to repurchase shares.

Mike Ashley bought his stake in Rangers in October 2014, when Sports Direct was trading at £6.10 per share. Following a plummet to £2.98 in June 2016, Ashley decided to sell his stake in Rangers, recognising the opportunity to reinvest the proceeds in Sports Direct shares at a massively reduced rate. In Sports Direct’s September 2016 AGM, shareholders agreed to increase the cap on share buyback, with Ashley using the Rangers money and Sports Direct’s cash reserves to buy back shares over the next 15 months. However, Sports Direct have recently hit the cap on share buyback while shares remain relatively undervalued £3.80.  

The filing made today was an increase on that cap. This will allow Ashley to continue repurchasing shares, and fulfil his speculated ambition of re-privatising Sports Direct. I believe this increase was agreed at the Sports Direct General meeting, held on the 17^th December. The minutes of this meeting and the contents of the filing are being kept confidential. I believe this is to hide how much the cap has been lifted, and keep the share price low. Following the first major share buyback, there was an 18% spike in share price. In my opinion, Mike Ashley wants to prevent people investing in the shares ahead of them being bought back, as he will have to pay the increased price. Saying this, the opportunity to buy shares is useless without any money. This brings us to the question, how Ashley will fund the buyback of SD shares?

Sports Direct’s Financial Situation:

In anticipation of Brexit, Sports Direct have entered discussions with lenders to engage in Currency hedging. Currency hedging is a method of reducing exposure to changes in currency rates. They weren’t engaged in this pre-referendum, and as a result their stock price was massively affected. Post-Brexit, Directors have identified currency rates as a huge risk to the company. The board have entered discussions with lenders to take on vast amounts of debt, which they will use to currency hedge and mitigate these risks. Couple this debt with the fact they have less than £1 million in cash reserves, it’s easy to see that Sports Direct are skint. There’ll have to be a vast injection of cash into Sports Direct if they are to use this filing and buy back their shares.   

Where’s the money coming from?

One option is that the money comes from Mike Ashley selling his shares in Debenhams. However, I believe this is unlikely. Debenhams stock has fell 15% since the new year alone, bringing Ashley’s initial investment of £85 million in October to a meagre £40 million valuation. Although this is a mere hunch, I believe Ashley is far too tight to accept such a loss. Even if he did sell his stake in Debenhams, £40 million wouldn’t be sufficient to fund his ambition of re-privatising Sports Direct. So, what are his other options?

The sale of Newcastle United to fund share buyback:

Today, a legal structure was established which enables Sports Direct to repurchase more of its own shares. This wouldn’t have been put in place unless Mike Ashley was planning to use it. In September 2016, he only waited 13 days before doing so. We’ve established Sports Direct don’t have the funds to do so this time, and require an injection of cash.

I believe Mike Ashley will sell Newcastle United to fund the buyback. Today, the cap was lifted as the sale is nearing completion, and he is legally preparing himself to re-privatise Sports Direct once the funds are available.

Admittedly, I have some doubts:

One option is that the cap lift could be part of a scheme allowing employees to buy shares in the company. However, given Sports Direct’s infamously poor track record of Employee welfare, I can’t see this being the case. Another option is that Ashley will simply cut his losses on Debenhams, reinvesting his £40 million into Sports Direct shares. This is financially plausible, but I don’t think it’s fitting with his character.

Despite these doubts, I still believe this filing is a key chapter in the Newcastle United takeover story. In isolation, I would dismiss this development as tenuous. However, given the history of Ashley, the history of Sports Direct, and the establishment of ‘Cantervale Limited’, I believe this is a major sign post that we are closer to a takeover.