Small investors and Mike Ashley rush to buy ‘bargain’ shares in Tesco

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Small investors have been heavy buyers of Tesco’s rock-bottom shares, it emerged last night, hours after the billionaire Mike Ashley took a massive bet on the shares rising.

Two of the country’s biggest retail stockbrokers reported that nearly one in five of all trades on Monday and Tuesday of this week had been in Tesco, with some 89 per cent being orders to “buy”.

As for Mr Ashley, he decided to invest, through his quoted retail company Sports Direct, in a bet that will pay off massively if it works – but will see him nursing a maximum £43m bill if it goes wrong.

Because the terms were not disclosed, it is impossible to tell how much Sports Direct will gain if the shares rise.

As is not unusual for the maverick retailer, Mr Ashley’s behaviour left Sports Direct investors and analysts scratching their heads over his intentions. It follows a similar bet on the department store Debenhams earlier this year.

Sports Direct has set up what is known as a “put” option with the investment bank Goldman Sachs. This in effect pays Sports Direct if the shares rise, but sees Mr Ashley’s company pay Goldman Sachs if they fall.

If Tesco’s shares fall to zero, Mr Ashley stands to lose £43m. The deal is structured in such a way that the bet involves about 0.2 per cent of Tesco’s total shares.

The share price has fallen by 15 per cent in the past four days and last night closed down a further 2.65p at 192.25p.

The Newcastle United FC owner could have an ulterior motive to bind Sports Direct closer to Tesco. In a statement, the sports retailer said: “The investment reflects Sports Direct’s growing relationship with Tesco and belief in Tesco’s long-term future.”

It already leases a handful of Tesco stores in Central Europe and South East Asia, including the Czech Republic and Malaysia, and it has been suggested that Sports Direct could take advantage of Tesco’s current woes to move into other struggling stores across the world.

The supermarket built its empire by opening huge sites on the outskirts of towns and is now stuck with large stores with too much space.

Jon Copestake, retail analyst at the Economist Intelligence Unit, said: “Sports Direct’s share buying just looks like good business sense – Tesco shares have been bottoming out with all the bad news, but now they have a new CEO and CFO in place as well as a new UK head; Ashley must be betting the only way is up.”

In January, Mr Ashley performed a similar put option over Debenhams with a view to getting Sports Direct into the department store. He was successful and opened a concession there later that month.

Meanwhile, Barclays Stockbrokers said trading volumes from its small investors in Tesco has soared since Monday’s revelation of a £250m profit shortfall. Chris Stevenson, vice president, said: “This illustrates that these investors see Tesco stock as a potential growth opportunity – they are anticipating that the shares will rebound.”

Richard Hunter at the retail broker Hargreaves Lansdown reported a similar surge and said his company had seen 92 per cent of trades as “buys” for Tesco.

He added: “Often one of the best times to buy shares is shortly after a big fall, and we have seen a big slide from Tesco. Of course this strategy doesn’t always work: investors in the banks at the start of the financial crisis will still be smarting.”

Spinning the wheel: Mike Ashley’s big bets

Mike Ashley loves to gamble. His most famous loss was in 2008 when a spread bet on HBOS shares saw the billionaire up to £300m out of pocket when the bank went bust. He bought Newcastle United FC for £135m in 2007; no buyer has yet been forthcoming and he found huge debts.

But he has had successes. His put option on Debenhams came on the back of buying a 6 per cent stake, selling it three days later and making a few million. A similar tactic at Adidas helped him pocket a reported £29m buying and selling a £200m stake within eight weeks, while a 12 per cent stake in JD Sports means even if his rival eats into Sports Direct’s sales, he still wins.