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Aug 24, 2018
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Debenhams investor confident of success, says Ashley won't get it cheaply

Aug 24, 2018

Sports Direct boss Mike Ashley hasn’t made his intentions towards Debenhams clear as of yet, but a major shareholder in the department store chain has said that if he want to buy it, he shouldn't expect to get it on the cheap.


As well as now owning House of Fraser, Sports Direct also has a 29.7% stake in Debenhams and there has been plenty of speculation that he might try to mount a full takeover and merge the two chains that are among the biggest rivals on the high street, in shopping centres and online.

With the Debenhams share price having recently fallen to a low of less that 12p, speculation around a possible merger has since nudged it up to almost 14p. But it has historically traded much higher than that and Martin Walker, UK equities fund manager at Invesco Perpetual (the fifth largest Debenhams shareholder with a 5% stake), told This is Money that he believes the retailer’s turnaround could work and that Ashley would need to pay a lot more to secure control of the business.

“I haven’t heard what Mike Ashley’s strategy is, but I wouldn’t sell the shares at this point. If he wants it, he can have it, but he’s going to have to get his chequebook out and pay up,” he said. "He may own nearly 30%, but Debenhams has an independent board and Sir Ian Cheshire, the chairman, is no one’s lap dog.”

Speculation about Ashley’s interest in Debenhams has actually gone on for some time and pre-dates his acquisition of House of Fraser. Through a number of complicated deals, the 29.7% stake he has acquired is just a whisker short of the 30% that would oblige him to launch a full takeover bid.

Neil Wilson, chief market analyst at online broker Markets, told the newspaper: “The rally in Debenhams’s shares is a clear indication the market believes Sports Direct could be ready to pounce. A move to effectively consolidate the two troubled department store chains into a single offering looks to be the only viable solution to their problems.”

But Walker isn't convinced it’s the only way forward and thinks that Debenhams could turn itself around, even though he admits it's risky. “I’m [holding the shares] because I believe the risk reward is in my favour. If things go right, the leverage for the upside is huge. This is not me saying that Debenhams is the future of retail in the UK, but the business has done a better of job at defending market share than the popular narrative would have you believe.”

He thinks the business could be on the verge of turning a corner and that just a slight improvement could see its margins (and share price) rising again, an improvement he thinks is feasible as inflation slows and consumers start to see higher wages.

He also thinks that the House of Fraser acquisition by Ashley could have a beneficial effect if the chain retreats from its recent discounting frenzy. With John Lewis, under its price-match promise, also discounting, that has affected the Debenhams ability to charge full price.

Walker said he has faith in the Debenhams management team and added that its £248 million debt level, at roughly 25% of the size of the debt House of Fraser was carrying, is more manageable, although it does still need to come down. The possible sale of the company’s profitable Danish unit Magasin du Nord, estimated to fetch anywhere between £100 million and £200 million, could have a major positive impact on the debt figure.

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