When it comes to the maverick mind of Sports Direct founder Mike Ashley, it is rarely clear what game he is playing.
The acquisitions of strategic stakes in businesses ranging from French Connection to Findel, House of Fraser to Goals Soccer Centres, have perpetually perplexed rather than pleased the City over the past few years.
Aside from the opening of Sports Direct concessions inside a number of Debenhams stores – half of which have now been axed – there has been little evidence of the companies in Ashley’s investment portfolio actively working together.
That changed today when Game and Sports Direct hit the start button on a “collaboration agreement” designed to power up the former’s push into the growing esports market.
“The duo clearly believe that teaming up to tackle the ever-challenging retail market co-operatively, rather than in single player mode, will benefit both businesses in their individual missions”
Sports Direct will host Game retail concessions and Belong-branded gaming arenas in its larger shops. It has also provided a £55m loan facility, which Game will use to fund the roll-out of Belong venues – it currently operates 19 across the UK.
As part of the deal, the sports and leisure giant has snapped up a 50% stake in Belong for £3.2m, giving it a vested interest in the growth and profitability of the esports business.
Reaching the next level
The duo clearly believe that teaming up to tackle the ever-challenging retail market co-operatively, rather than in single player mode, will benefit both businesses in their individual missions.
Game is on a drive to transform itself from a seller of consoles, games and accessories into a facilitator of gaming experiences.
And Ashley has long-voiced his lofty goal of transforming Sports Direct into the ‘Selfridges of sport’ by creating a more department-store-esque, experiential shopping experience.
For both retailers, the partnership brings a chance to take these quests to the next level, but the benefits for Game, in particular, are clear.
As analysts from Game’s joint house broker Liberum note, the retailer’s largest Belong arenas are those that generate the highest revenue contribution and return its initial investment quickest.
Its largest arena to date, which boasts 36 desks, cost £150k to set up – capex that will be paid back in just nine months.
By contrast, an average ‘tier C’ Belong arena, containing just 15 desks at a cost of £70k, would take almost two years – 21 months – to turn a profit.
But Game has rapidly run out of physical space to install those larger, more cost-effective arenas.
Sanjay Vidyarthi, from the retailer’s second joint-broker Cannacord, notes: “Game’s existing retail store portfolio, with an average store size of 1,200sq ft, contains no stores suitable for the larger Belong format.
“While lease lengths are short, the cost of closing stores and opening new, larger venues is likely to be significant.”
Game has 221 leases that are either up for renewal or have a break clause approaching by the end of the year.
The Sports Direct concession partnership therefore provides a prime opportunity not only to hasten the roll-out of arenas, but to streamline its existing store portfolio without sacrificing points of presence.
Such strategic upticks were warmly received by the market, as Game’s share price jumped 10% to 41.80p by mid-afternoon on Monday.
Indeed, Liberum upgraded the Game stock to a ‘buy’ and maintained its target price of 65p, reaffirming its confidence in further share price growth in the wake of the tie-up.
After three years in the stock market doldrums, the time could now be right for investors to play the Game.