Sports Direct proposes possible offer for Debenhams

Sports Direct, which owns the House of Fraser department store chain and a 30% stake in Debenhams, said it believed the £61.4m possible offer, a premium of 127% to Tuesday's closing price but around half the price six months ago, represents "fair and full value".

Sports Direct "does not believe that Debenhams has the same value if it is (in effect) handed over to Debenhams' existing lender group", with the department store group saying last week that it was in talks to raise £200m to give it time to arrange a larger refinancing but this could lead to the value of its shares being wiped out completely.

In order for the possible offer to be made, Debenhams must not only immediately appoint Ashley as its boss and end the process of gaining support for its restructuring from bond-holders that was announced last week, but also Sports Direct wants Debenhams to agree not to enter into any third party funding arrangements, nor grant any new security over any of its assets nor enter into any administration, CVA or other insolvency process.

If so, in connection with the possible offer, Sports Direct said it "would also assist Debenhams in addressing its immediate funding requirements".

On Monday evening Sports Direct first revealed that it was considering a possible offer, leading Debenhams to respond that it would give due consideration to any firm proposal.

Shares in Debenhams jumped to 5p on Wednesday morning before dropping back to 3.32p just before 0930 GMT, a 50% rise on the day.

Analyst Laith Khalaf at Hargreaves Lansdown said: "Mike Ashley has clearly decided it’s double rather than quits on Debenhams."

Khalaf said that it would not be a simple choice for the Debenhams board to consider: "There’s a bit of a chicken and egg situation here too. If Debenhams appoints Mike Ashley as CEO, then there’s little to bind Sports Direct to making a firm offer.

"This is not conventional corporate behaviour by any means, but that’s what we’ve come to expect from the Sports Direct CEO. What we haven’t had from either Mike Ashley or Debenhams is a strategic plan for the long term future of the company, and today that still remains sadly lacking."

John Stevenson at Peel Hunt agreed that making Ashley CEO ahead of the offer "would not trigger any change of ownership clause on the company’s debt, allowing him to take control of the business before making an offer".

He said Ashley was making another effort at "protecting his own interests", with no guarantee that any offer would be made if he was actually appointed CEO.

In the words of Russ Mould at AJ Bell, "Sports Direct continues to dangle a carrot in front of Debenhams but it has yet to feed the horse."

In the latest episode of what he called a "retail soap opera", Mould said the Debenhams board was faced with a sticky situation: "They clearly dislike Mike Ashley and his team yet any takeover proposal must be considered with shareholders’ interests at heart.

“The business is in a very difficult position both financially and operationally and here we have a party which believes it has a solution to both issues.

“Debenhams has sunk so far down into its hole that time is running out before it disappears altogether."

He added that while Debenhams has said that Sports Direct’s plan isn’t enough to address its immediate funding requirements, other shareholders may consider that the takeover proposal "could provide a huge difference as their investment would still be worth something" and suggested Debenhams "really needs to put pride and ego to one side and have a proper conversation with Sports Direct about whether its proposal has merit or whether it can provide another solution.”

But, understandably, investors don’t quite know what to make of where things stand, noted Neil Wilson at Markets.com, leading to volatility in the shares on Wednesday and suggesting investors think there’s a roughly 50/50 chance the bid will succeed.