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Tracksuit tycoon Ashley gets Frasers in shape

·5-min read
Mike Ashley Sports Direct Frasers
Mike Ashley Sports Direct Frasers

Michael Murray, the incoming boss of Frasers, rubbed shoulders earlier this month with fashion bigwigs including Tommy Hilfiger and Christian Louboutin.

“We connected, listened, and learned,” the 32-year-old and prospective son-in-law of Mike Ashley, gushed to his social media followers.

While the remarks could be perceived as posturing, it points to efforts afoot to significantly grow the company’s premium offering as Murray prepares to take the helm next summer.

This isn’t the only change expected down the line. Strong trading has prompted rising speculation that tracksuit tycoon Ashley could be plotting a move to take the company private.

The premium unit has grown into a key unit as the group’s second biggest revenue generator thanks to Flannels, its luxury department store chain. There are plans to turn the arm into a £2bn business by 2026 – roughly the same amount as the parent group made in the first half of this financial year. Sports Direct, another subsidiary, remains the top moneymaker.

Now, Frasers, which also owns Evans Cycles and House of Fraser, is on course to report its highest ever profit of up to £350m this year after a strong recovery in recent months. The last time it reached such figures was in 2015 with underlying profits of £300m.

“It is in the best shape it’s been for a while,” says Jonathan Pritchard, a retail analyst at broker Peel Hunt. “It’s interesting how Sports Direct and JD Sports have evolved. It’s always been: ‘if one’s doing well, the other is doing badly’.

“But they’re not in contradiction anymore. One is about super trendy trainers for the pub [JD], the other is about pretty decent running shoes and football boots. Frasers has also been assisted by the drive to exercise more during the pandemic.”

Such recent performance, coupled with an intensive process to buy back its own shares, have prompted speculation of delisting.

“It depends on what Ashley thinks it is worth,” says one M&A banker.

Some industry observers suggest, however, that hefty one-off costs against property last and this year amid the pandemic, mostly against House of Fraser stores, cloud the business’ fortunes. It logged £135m of impairments in its first half, dragging its luxury division to a loss.

But Richard Chamberlain at Royal Bank of Canada isn’t phased, arguing the charges are not unusual: “I think they’re trying to be conservative by recognising impairments for the ongoing impact of the Covid-19 pandemic, further restrictions including lockdowns returning to parts of Europe, the availability and cost of shipping containers and other supply chain cost increases, and the likely cost of living squeeze on consumers.”

Meanwhile, a City source says a deal to take the FTSE 250 firm private may not be that far off following Frasers’ recent share buyback efforts worth millions.

Ashley has had a chequered relationship with the City since it listed in 2007 - at one point calling the Square Mile “a bunch of cry babies”. Such a move would also give Murray a blank canvas to realise his ambitions away from the prying eyes of investors – not that they have the power to affect meaningful change.

Mike Ashley now holds a 68pc stake. Last week, the firm said it would spend a further up to £70m purchasing a maximum of 10m of its own shares by April. Typically, once the 75pc threshold is reached, private ownership looks more likely.

The group has so far said that purchasing more shares was to “reduce the share capital of the company”.

A spokesman for Frasers Group told The Telegraph: 'That there is no current intention to take the company private'.

Mike Ashley - Nick Ansell /PA
Mike Ashley - Nick Ansell /PA

Companies typically buy shares to reduce the number available to the public, which tends to push up the share price and is a way to return cash to investors other than paying dividends.

“Any shareholder will often fold if they make an offer for it,” the City source adds. “No one wants to be left as a minority in an unlisted business. Logically you could see a scenario where they could take it private.”

This could prove costly for Ashley, however. Fraser’s share price has increased by more than two thirds to more than 730p so far this year, meaning, as Lord Rothermere’s recent deal highlighted, any offer would have to be compelling for investors.

The newspaper tycoon increased his offer to take the group behind the Daily Mail private for a second time following a backlash from shareholders.

Despite the speculation, RBC’s Chamberlain is doubtful that Ashley, who has been in charge since 2016, is in a rush to delist the 39-year-old retailer.

“They have surplus cash flow and are well under their three times net debt / underlying profits bank covenant,” says Chamberlain in his explanation of the buyback programme. “It helps to make their capital structure more efficient.”

Meanwhile, Peel Hunt’s Pritchard believes any transaction would be too costly at present.

“Why didn’t he do it at £3? I don’t think that’s the game,” he says. “The shares were cheap [when they started the buyback]. They have an investment agenda, they generate cash, so why wouldn’t you put your money where your mouth is?”

Net debt was £24m at the recent interim earnings, for the half year to October 24, down from £248m. The company, however, recently arranged a new £930m loan with HSBC.

Finance chief Chris Wootton has indicated that fresh money could give Frasers the “firepower” to embark on more deals.

When it comes to Frasers’ next steps, a lot is riding on the trading environment, particularly if the country is plunged back into tougher restrictions on the back of the omicron variant and shoppers stay away from the high street – just as Boxing Day and New Year sales arrive.

The company warned as much this month, saying that the latest developments cast “a shadow of uncertainty” on sales.

While performance “continues to be strong”, it said substantial lockdowns in the UK, “particularly over the important Christmas period”, could derail even its best laid plans – whether that is to press ahead with its “elevation” strategy and modernise the stores, or convince investors to sell their shares and end 14 years in the glare of public markets.

CLARIFICATION: This article and its headline have been amended to reflect the fact that Frasers Group denies that there is any current intention to take the company private. We are happy to make this clear.

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