Mike Ashley’s Sports Direct (LSE: SPD) has been making headlines for years now, and generally for the wrong reasons, especially in recent months. It has been struggling to find an auditor, and it has come up against accusations of poor working conditions in its various warehouses and criticism of its acquisition policy.
It is perhaps surprising that despite what is arguably a hostile market for the firm, it has continued to make or attempt so many acquisitions – most recently announcing it has approached ailing Goals Soccer Centres, with a potential £3.6m purchase offer.
When opportunity knocks
An aggressive acquisition policy in times of trouble can go both ways, but rarely goes down the middle. On the one hand it can prove too much for shareholders or a company’s finances, and mark the beginning of the end. On the other hand, it can bring in fresh revenue, diversification, and show confidence to potential investors that bolsters the stock. For Sports Direct, which of these two scenarios will be the result remains to be seen.
In this latest proposal, Mike Ashley seems to have spotted an opportunity. Sports Direct was already the largest shareholder in Goals Soccer Centres, with a 19% stake, and as the company has had plenty of problems, it may now be going cheap.
Sports Direct reportedly offered 5p per share, valuing Goals at a fraction of its £20.5m market cap when the shares were suspended in March. Of course, if Sports Direct can make it profitable again, it could be a canny move on Ashley’s part.
I have to admit a certain admiration for this more aggressive strategy. While analysts and market commentators are generally bearish on Sports Direct, including me, Ashley is seemingly ignoring the doubters.
Not quite ready to invest
Now don’t get me wrong, as much as I can’t help admire this aggressiveness, I still think there is a lot of downside potential for Sports Direct that has me worried. The delayed results report earlier this year following a “last minute” Belgian tax bill worries me, as does the fact that no accountancy firm seems willing to take up auditors’ mantle.
I recently analysed some of the company’s numbers and in truth they did not come across too badly. However I feel this may be misleading, not least because the financial accounts they are based on have already come up against delays and late additions.
More fundamentally, as a potential investment, the company has seen fairly poor earnings numbers for years, and offers no dividends to entice those seeking income. Combined with some bad publicity in the past, it leaves a lot to be desired.
Unfortunately I can’t help but feel this acquisition strategy may be falling into the trap of trying to buy yourself out of trouble – something that rarely works. Meanwhile the underlying problems and uncertainties with Sports Direct just make this a company that I want to avoid.
