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Sports Direct - cash bid for GAME Digital

Nicholas Hyett | 6 June 2019 | A A A
Sports Direct - cash bid for GAME Digital

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Frasers Group plc ORD GBP0.10

Sell: 435.40 | Buy: 436.60 | Change 1.60 (0.37%)
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Sports Direct has upped its stake in GAME Digital to 38.5%, triggering a mandatory takeover offer.

Mike Ashley's retail group said it will offer 30p per GAME Digital share, representing a 27.4% premium to the share price on the last business day before the offer, and values the group at £51.9m.

Following a review, Sports Direct would consider closing some sites, or merging them with other Sports Direct stores.

The shares were little moved on the news.

Find out more about Sports Direct shares including how to deal

Our View

Following the failed attempt to buy Debenhams earlier this year, Sports Direct has now made an offer for GAME Digital. Sports Direct already had a 29.9% stake in GAME, with a partnership established for in store pay-to-play console stations.

The £36.4m price tag may be small chips to Sports Direct, but it's still a struggle to see how the two businesses really hit side by side.

Beyond the headline grabbing acquisitions, the plan for the core business is a bit clearer.

The "Selfridges of Sport" initiative calls for new freehold 'flagship' stores, displaying products in a more flattering environment. A better store environment should, in theory, allow the group to charge more for its products and heal Sports Direct's troubled relationships with the major sports brands as well.

The new format stores are said to be "exceeding expectations". But, possibly due to the challenging retail environment, it's hard to see evidence of that in the numbers. Improvements in underlying profits have been driven by cost cutting and one -off currency-related moves.

'Elevating' the store estate isn't coming cheap either. While the group generates plenty of cash, is far from heavily leveraged, debt has been ticking up.

Sports Direct hasn't paid shareholders a dividend since 2010 - arguing that the money could be more usefully invested back in the business. However the group has dabbled with share buybacks.

At the heart of Sports Direct is an impressive and attractively cash-generative business. But our concern is that attention isn't fully focussed on the core operation.

Two struggling sports chains in the US must be demanding disproportionate amounts of management attention, and America has been something of a graveyard for UK retailers. Added to that is an eclectic, and growing, collection of 'strategic investments' - the performance of which has cost the group millions recently.

Combined with a corporate governance record that's erratic at best, there are plenty of reasons to be cautious where Sports Direct is concerned.

The shares trade on 14.6 times expected earnings, just shy of their longer-term average.

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Half year trading details (13 December 2018)

Half year operating profits were down 26.8%. However, take out the impact of a higher depreciation charge and £31.6m of losses from House of Fraser, and cash profits rose 14.6% to £180.3m, boosted by higher gross margins.

Full year guidance for underlying cash profits to rise by 5-15% remains unchanged

Revenue rose 4.5% to £1.8bn. However, strip out currency movements and the £70m of revenue added via the acquisition of House of Fraser, and the underlying change is just 0.2%.

That reflects flat sales in the core UK Sports Retail division, steady at £1.1bn as online growth cancelled out declining trends in the store estate and the impact of store closures. Divisional cash profits rose 1.5% to £147.7m

The European business saw profits rise 42.2% £19.2m, as favourable hedging rates and cost cutting more than made up for falling sales, down 5% at constant exchange rates to £313.1m.

The remainder of underlying group profit comes from the Wholesale and Licencing, Premium Lifestyle, and Rest of World segments.

Despite an increase in free cash flow, the £90m spent on acquiring House of Fraser meant net debt increased from £397.1m to £505.5m. That represents 1.5 times earnings before interest, tax, depreciation and amortisation.

Find out more about Sports Direct shares including how to deal

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.