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Sports Direct falls 3% as it takes full control of Irish retailer Heatons

Discussion in 'Market News' started by Lily, Oct 7, 2015.

  1. Lily

    Lily Forum Member

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    Analysts disappointed Mike Ashley’s company has not sewn up bigger deal

    Sports Direct International is on the slide after unveiling a deal to take full control of Irish clothing retailer Heatons.

    Mike Ashley’s retail business currently owns 50% of Heatons, which has 44 stores in the Republic of Ireland and ten in Northern Ireland, and is paying €47.5m for the rest. Heatons has a Sportsworld section in 27 of the 44 stores in the Republic, while the ten stores in Northern Ireland incorporate a Sports Direct section or have a Sports Direct outlet as part of the premises.

    Sports Direct is keeping itself busy, now acquiring the 50% of Heatons, the Irish retailer, that it doesn’t own. This looks like a perfectly sensible deal: Heatons is well known to Sports Direct, and the Sports Direct brand is well known in Ireland. On a low double digit multiple there is limited risk here but this is not the game changer that Sports Direct has been promising us and with core forecast momentum still profoundly negative, the shares hold no appeal to us whatsoever: we stick with a sell (target price 720p).

    [Buying Heatons] doesn’t really move the dial: so it’s a worthy and probably slightly enhancing deal.

    We commented in a recent update ‘the company has significant free cashflow with 2016 capital expenditure forecast at £65m but does not appear to have a clear strategy to reinvest these resources. The focus, in our view, should be on strategic acquisitions rather than on opportunistic investments, developing more broadly the business overseas and growing on-line sales’.

    This acquisition is encouragingly strategic and in our view and should be viewed as positive. We are maintaining our hold recommendation and target price of 760p.

    While it is not explicitly stated, the deal looks earnings enhancing immediately. In the year to April Heatons had sales of €219m and pretax profit of €10m. Sports Direct needs acquisitions to hit stretching employee share scheme targets. This is a small step towards those.

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