Sports Direct has a new target: Game Digital

Owner of Sports Direct and Newcastle United, Mike Ashley, arrives at the High Court on July 10, 2017 in London, England. Mr Ashley is defending himself against a lawsuit filed by former business associate Jeff Blue. (Photo by )

Carl Court/Getty Images

LONDON — Sports Direct is back building ownership stakes in other retailers.

Filings on Thursday show that the company built up a 25.75% stake in Game Digital, the struggling High Street and online video game retailer. Sky News first reported the stake on Wednesday evening.

Game said in a statement on Thursday morning it "is pleased that the strategic value of the group has been recognised by Sports Direct through this acquisition of a 25.75% stake.

"The Group looks forward to working collaboratively with Sports Direct to explore the clear opportunities that a constructive partnership and collaboration can deliver for all stakeholders in the gaming, live events and rapidly growing esports markets in which it operates."

Game's share price closed up over 22% on Wednesday before the stake was made public and amid speculation of higher-than-average trading activity.

Sports Direct's motive for taking the stake is unclear. Billionaire founder and CEO Mike Ashley has a fondness for taking stakes in other listed rivals and Sports Direct currently holds positions in Debenhams and French Connection. Some analysts see the position building as leverage for deal making.

Ashley may simply see Game shares as a bargain. Shares in the company collapsed by 36% last month after a profit warning.

Retail analyst Nick Bubb says in his morning email on Thursday: "The best that can be said about the latest bizarre investment by Sports Direct is that the stake in Game Digital only cost the company about £10 million, such is the low level to which the Game share price has sunk.

"How much Mike Ashley knows about the “esports” market remains to be seen, but the shorts of Game Digital will console themselves with the thought that Mike Ashley’s support hasn’t stopped the Debenhams share price from sinking further."

Ashley is currently being sued by former advisor Jeff Blue over an alleged £15 million bonus. Blue, a former Merrill Lynch banker, worked to help Sports Direct secure a corporate broker in 2013 and in his witness statement in the case says that Sports Direct's practice of buying shares puts off many in the City.

"It is regarded as highly unconventional for a major listed company to invest in other listed companies," Blue said in his statement. "This reflects a number of concerns that investors have with these arrangements, including: (i) a prospective investor assessing the merits of an investment in Sports Direct would find it more difficult to make that assessment where Sports Direct’s performance was affected by the performance of other listed companies; and (ii) the risk inherent in an investment in Sports Direct becomes more volatile if the Company acquires or trades in the shares of other listed companies."

Sports Direct has yet to comment on the Game Digital stake.

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