Sportswear retailer Sports Direct International (LSE: SPD) announced this morning that it had entered into an options deal that’s effectively a £43m bet that Tesco (LSE: TSCO) shares will rise.
Sports Direct founder Mike Ashley is likely to be the driving force behind the deal, which is not his first of this kind: earlier this year, he made a near-identical bet that shares in Debenhams might rise.
What’s happened?
Without getting into the technicalities of Sports Direct’s options agreement with Goldman Sachs, this is how the deal, which covers 23m Tesco shares, will work.
If Tesco’s share price falls below a certain level, known as the exercise price, then Sports Direct will have to pay Goldman the difference between the Tesco share price at the time of expiry and the options’ exercise price.
On the other hand, if Tesco’s share price rises above the exercise price, then Goldman will pay Sports Direct the difference between the exercise price and Tesco’s share price at the time the options expire.
Sports Direct says its maximum liability under the deal is £43m, once the premium it has received from Goldman Sachs is discounted. This suggests to me that the exercise price is in the region of 200p, but the firm hasn’t disclosed this.
Is Tesco a buy?
Although Mike Ashley’s belief in Tesco’s turnaround potential might be a positive sign, I wouldn’t buy Tesco shares purely on the basis of Mr Ashley’s latest punt.
There are several reasons for this:
1. We don’t know the exercise price or expiry date of the options. We won’t necessarily know when the options are exercised, either — this could be a very short-term trade, or a longer deal.
2. We don’t necessarily know about any planned business deals between Sports Direct and Tesco. Today’s announcement mentioned ‘ Sports Direct’s growing relationship with Tesco and belief in Tesco’s long-term future‘, but this could mean almost anything.
3. Sports Direct or Mike Ashley might own shares in Tesco. Such a shareholding would not be large enough to require public disclosure, but today’s option agreement could be an attempt to salvage a profit from a loss-making position.
Ultimately, if you are considering buying shares in Tesco, then Mike Ashley’s decision to back the firm might be a useful piece of supporting evidence — but I wouldn’t buy Tesco shares on today’s news alone.