James Moore: Investors' jitters about Sports Direct are justified

 

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The Independent Online

Outlook Sports Direct shares have been wobbling like one of the cheap basketballs it sells hitting the rim of a net.

The cause of the shudder is the impending departure of Jeff Blue, a former Merrill Lynch banker who joined the company in 2012 to head its investor relations department and oversee mergers and acquisitions – an area where it has been active, to put it mildly.

In addition to the identification of acquisition targets and the formulation of strategies to reel them in, Mr Blue has had a hand in some of the more eccentric flights of fancy undertaken by Mike Ashley, the founder of Sports Direct, over the past couple of years. These have involved the company’s use of derivatives to make bets on the shares of other retailers. Sometimes these have been competitors, sometimes potential business partners. Sometimes they’ve just been down on their luck. Sometimes they’ve have had elements of all of these.

Sports Direct took an interest in Debenhams’ shares after a profits warning – a move partly motivated by its hopes of persuading the latter to agree to trial Sports Direct concessions in its outlets (successfully, as it turned out). However, while Sports Direct and Tesco had already forged links, particularly in Asia, Sports Direct’s purchase of an option on Tesco shares looked like more of a gamble wagered in the hope that the shares would turn around (the use of a put to make a punt).

It is a source of considerable frustration to outside investors in the company that Mr Ashley, who calls the shots despite what his position as executive deputy chairman might imply, plays these sort of games. He has built his company into one of this country’s most impressive retailers – a disruptive entrant into a market that it has since grown to dominate. Moreover, it is a rare British retailer that has successfully exported its formula overseas.

More recently, however, questions have been asked about where its future growth lies. You would think that Mr Ashley would have his hands full with answering them. Instead, he seems to be intent on engaging in unsportsmanlike conduct in the boardrooms of the beautiful game, with his attempts to gain control of Glasgow Rangers, in addition to Newcastle United.

While he is still intimately involved with driving Sports Direct strategy, it sometimes seems as if it is there simply to provide him with funds for his love of a retail gamble, and it would be better off in the stock market’s “other financials” sector as a result.

The market’s worried reaction to Mr Blue’s departure might therefore seem to be counter-intuitive. If the man in charge of placing Mr Ashley’s bets is gone, then surely Sports Direct’s other managers should be able to get on with the job of doing what the company does best?

Would that it were so. Mr Ashley was dallying with derivative contracts long before Mr Blue joined the company, and at least with him there he had the assistance of a skilled practitioner. Moreover, Mr Blue was also filling in as finance director. Given that, there is good reason for that Dunlop basketball to be rattling around the rim. The market’s jitters had calmed by the end of the trading day yesterday, but they seem to be more than justified.

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