Sports Direct seeks Debenhams links after stock swoop

LONDON, England - Britain's Sports Direct has bought close to a 5 percent stake in Debenhams, raising the possibility of the troubled department store group selling some of the value retailer's brands in its stores.

Debenhams shares, which hit a 22-month low of 71 pence after a New Year's Eve profit warning, climbed as much as 6.5 percent on Monday after Sports Direct said it had bought a 4.63 percent stake and wants to explore how the groups can work together at an operational level.

Sports Direct's stake, worth 46 million pounds ($75.8 million) at Friday's closing price of 81.6 pence, makes the Mike Ashley-controlled company the seventh-largest investor in Britain's second-largest department store group.

Analysts interpreted the move as an indication that Sports Direct will seek to establish concessions for some of its fashion brands, including Firetrap, Kangol and SoulCal, in some of Debenhams' 156 UK stores, using its new position as a major shareholder as leverage in negotiations.

They did not view the development as placing Debenhams in the takeover spotlight.

Sports Direct, which joined the FTSE 100 index of blue-chip companies in September, said the stock purchase had taken place without the prior knowledge of the Debenhams board but said it has communicated "its desire to work together" and its "intention to be a supportive shareholder".

Prior to Monday's development, shares in Debenhams had lost 22.4 percent of their value in three months and 7.1 percent over the past month.

OPEN-MINDED

Debenhams, which also parted company with its finance director on the back of the profit alert triggered by awful Christmas trading, said it was "open-minded" about exploring opportunities to improve its performance alongside existing initiatives to accelerate its multi-channel and international development.

It also said that any such moves would aim to create value for all Debenhams shareholders, highlighting that Sports Direct is one of a number of large stakeholders.

Sports Direct, in which Newcastle United soccer club owner Ashley owns 62 percent, has grown rapidly to about 400 stores across Britain through a mixture of acquisitions, rising online sales and the demise of rivals such as JJB Sports, leading the UK sports scene with value-led offers that have chimed well with cash-strapped Britons.

Though Debenhams said Christmas trading reflected an unprecedented level of promotional activity across the retail sector, the company has been criticised for excessive discounting, which some analysts feel is damaging its brand.

"The way forward for Debenhams ought to be to move upmarket a bit, discount less ... Dragging Debenhams downmarket and turning it into even more of a discount store may not appeal to retail purists," independent retail analyst Nick Bubb said.

Like Debenhams, Sports Direct, which also owns the Dunlop and Lonsdale brands, has set it sights on a greater presence across Europe, where it operates in 19 countries.

Over the past two years the company has considered acquiring department stores group House of Fraser and has in the past bought stakes in retailers including JD Sports, JJB and Blacks Leisure, with mixed success.

"In our view, one should not read too much into this new investment," said Cantor Fitzgerald analyst Freddie George.

"This acquisition provides a further distraction alongside all other recent investments and broadly increases Sports Direct's net debt to circa 160 million pounds," he said.

Shares in Debenhams were up 4.7 percent at 85.5 pence by 1229 GMT, while shares in Sports Direct were down 1.3 percent at 745.8 pence.