Department store House of Fraser has been rescued from the clutches of administration for just £90m cash after talks with creditors failed. Billionaire buyer Mike Ashley, owner of Sports Direct, continues to go against the grain of an ailing high street, buying more space and taking stakes in struggling outfits. He either has incredible foresight about a retail sector shift (we all agree, more and more online), with method to his apparent madness. Or he is simply a retail empire-building megalomaniac.

Only recently the larger-than-life Newcastle football-loving CEO had to write down a chunky £85m loss on a near 30% stake in Debenhams (DEB). Its share price has fallen to fresh record lows (-65% this year alone), dogged by the same issues hurting all bricks & mortar retail: fierce online competition, changing consumer habits, falling footfall, lack of differentiation (vs. Debenhams, John Lewis etc), expensive rents and consumer uncertainty about both Brexit and higher UK interest rates.

Debenhams shares are +1.95% today to 11.75p on speculation that it might be combined with House of Fraser, reducing competition (both on product and, especially, on price). Crucially, consolidation would allow for a reduction in costs, eliminating duplicated positions and offering opportunities for synergies to improve profitability.

He already owned 11% of House of Fraser, which probably made today’s rescue easier in terms of due diligence, so the £90m implies a near £100m valuation. Still not much for such an iconic brand with access to some prime-real estate (e.g. Oxford St, and the Monument branch I pass twice a day, standing proudly at the north end of London Bridge looking over at the Shard).

Good news for the 5,900 directly employees, at risk of losing their jobs until early this morning, is that they will now all be moved under the Sports Direct umbrella. And landlords of the 59 shops still open, 31 of which were slated for closure.

Still at risk, however, may be suppliers and wholesalers with invoices for goods already delivered to stores, with the rescue package including all House of Fraser’s UK stores, the House of Fraser brand and, importantly, all of the stock in the business.

It will be interesting whether Ashley follows through on closing those 31 stores or tries to capitalise on oft prime real-estate positioning to re-brand them in favour of his flagship bargain sports emporium. Perhaps he saw short-term value in a combination of both the stock/inventory and potential for re-branding. Most of his stores are packed to the rafters with merchandise, which doesn’t always make for the best shopping experience.

Perhaps more would venture in if there was more space; less warehouse more premium store. Only last year he declared his desire for Sports Direct to become “recognised as the Selfridges of sport”. Could today’s rescue mark the first major step towards this goal, via access to some fancier real estate?

Sports Direct shares are down just 0.37% to 405p today, suggesting investors giving the CEO the benefit of the doubt, that he can muster something that helps the shares (+7.5% this year) back towards recent 435p highs (8% above), perhaps even engineering a breakout towards the 500p mark (23% above) last seen at Christmas 2015. The risk is that today’s rescue is badly digested and the shares break below 400p towards 2018 lows of 351p (13% below).

It’s still early days, but we would expect to hear more about Ashley’s plans soon, which could result in bigger share price moves. Might a full takeover offer for the remaining 60.1% of Debenhams eventually be on the cards? He stopped short of the 30% ownership threshold that would force him to make an offer, however, with a market capitalisation value of just £141m, and with decidedly more outlets (170 in UK & Ireland), could it be his next target, for yet more prime space?

To stay in on top of Ashley’s plans and the share price moves of both Sports Direct and Debenhams, get access to our award-winning research and let us help you make the most of his foresight or folly.

Mike van Dulken, Head of Research, 10 Aug 2018