Sports Direct revealed this morning that it has taken a surprise 4.63% stake in troubled department store group Debenhams. Retail Week takes a look at the City reaction.

The company has confirmed this morning that it has acquired a 4.63% stake in Debenhams (DEB LN – SELL – TP 70p) or 56.8m shares (c.£45m). It apparently wishes to explore options at an operational level to work together with Debenhams. This would imply to us that the company is potentially considering splitting the fashion assortment from the sports ranges in its stores over the medium term. Sports Direct has looked very closely at acquiring House of Fraser over the last year and has in the past been active in buying stakes in other retail companies, not always with great success, including JD Sports, JJB and Blacks, so in our view one should not read too much into this new investment.  For the time being we are not changing our HOLD recommendation. In our view, this acquisition provides a further distraction alongside all other recent investments and broadly increases Sports Direct’s net debt to c.£160m. In respect of Debenhams, we are maintaining our SELL recommendation although we think the stock is likely to go better on the news this morning. Cantor Fitzgerald analyst Freddie George

Sports Direct has today announced that it has taken a 4.63% (£46m) stake in Debenhams. A surprise move that raises a lot of questions for both companies. Sports Direct has, of course, taken strategic stakes in businesses before (Amer Sports, Adidas, JJB, Blacks Leisure) and currently has a c. 12% stake in JD Sports (since 07/08) worth c. £90m. What could the rationale be with Debenhams though, given the lack of product overlap? A full takeover or attempt to merge the businesses in any way seems unlikely to us and the wording of the statement suggests a more collaborative approach.

Debenhams has 167 own stores in the UK and Ireland and 6 in Denmark, as well as 65 international franchise stores. Sports Direct has 409 Sports Retail stores in the UK, 26 in Ireland and 243 in Europe. It also has 142 Premium Fashion stores in the UK.  Between them, the two retailers have a lot of space and a lot of brands (both have about 50% own label/house brand sales). There would be some overlap between the Sports Direct and Debenhams customer demographic, but less so with Premium Fashion. We would not expect those brands to be sold through Debenhams and it is unlikely that many of Debenhams’ own label, Designers at Debenhams or third party brands would be suitable for either Sports Direct or its Premium Fashion stores. For Debenhams, speculation could well support the shares. For Sports Direct, the market may need to understand the rationale better to get comfortable.  Liberum analyst Sanjay Vidyarthi

The big rally in Debenhams on Friday looked surprising, but it is now clear that it was Sports Direct who were buying. No doubt Mike Ashley has some ideas on how to trade from Debenhams’ surplus store space and he has some experience of making big space retailing work, via the infamous Lillywhites store in Piccadilly Circus. It also well known that he looked briefly at buying House of Fraser at the end of 2012. But dragging Debenhams downmarket and turning it into even more of a discount store may not appeal to retail purists. Independent analyst Nick Bubb

Mike Ashley's Sports Direct acquires 4.63% stake in Debenhams