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Sports Direct International Plc Makes £131m Bet On Debenhams Plc: Which Should You Buy?

Sports Direct International (LSE: SPD) founder Mike Ashley clearly has a fixation with Debenhams (LSE: DEB).

On Friday, Sports Direct announced that it had entered into a new put option deal relating to a potential 10.5% stake in Debenhams. Put simply, if Debenhams share price falls below a certain level, Sports Direct will be required to purchase a 10.5% stake in Debenhams.

If Debenhams’ share price rises, Sports Direct will receive a one-off premium payment from the counterparty in the options deal, Goldman Sachs.

This is an unusual deal — but Sports Direct has form.

16.6% interest in Debenhams

Last year, Sports Direct bought and sold shares accounting for 9.2% of Debenhams, and entered into two option deals giving the firm a potential interest in around 12% of the retailer.

Friday’s announcement also revealed that one of the firm’s previous option deals has now ended, but one is still active.

This means that Sports Direct’s exposure to Debenhams is worth £131m, and is equivalent to owning a 16.6% stake in the firm.

Buy or sell signal?

If you believe that Mr Ashley is a smart investor whose insights are worth following, then does this new deal suggest you should buy or sell Debenhams shares?

In my view, this deal suggests that Mike Ashley believes that sooner or later, Debenhams will make a strong recovery — otherwise why would he risk being lumbered with such a large stake?

Debenhams certainly looks cheap, trading on a 2015 forecast P/E of 10, and a prospective yield of 4.6%. I was also encouraged by the firm’s recent trading update, which suggested to me that Debenhams turnaround is going well.

What about Sports Direct?

Unlike Debenhams, Sports Direct doesn’t look cheap — but it does seem to have terrific momentum. The firm’s shares are up 85% in two years and earnings per share are expected to rise by 23% this year.

My main concern is the way that Mr Ashley’s 52% shareholding appears to enable him to use Sports Direct as his personal investment vehicle: last year, he also entered into a similar options deal regarding a £43m stake in Tesco.

This, coupled with the lack of a dividend, puts me off owning shares in Sports Direct — but your view may differ.

Indeed, if you’d invested in Sports Direct five years ago, you’d be sitting on a 650% profit today. In contrast, Debenhams investors are up by just 13%, plus dividends, over the same period.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.