Mike Ashley is threatening to derail Nike’s friendly bid for Umbro, the British football company, after his sprawling sports retail and wholesale business, Sports Direct International (SDI), built up a stake of nearly 30 percent in Umbro last week. Umbro’s board approved a bid worth £285 million (€404.7m-$591.3m) by Nike last month, but under its current structure, known as a scheme of arrangement, the offer will go ahead only if approved by investors holding at least 75 percent of Umbro’s shares, which would now have to include SDI.
Sports Direct paid about £40 million (€57m-$83m) to lift its stake in Umbro to 29.9 percent, just below the 30 percent threshold that would force SDI to issue a bid for the whole company. SDI had lifted its stake in Umbro to 15.04 percent just before Nike announced its bid, but the latest chunk of 20 million shares nearly doubles SDI’s shareholding. It is unclear whether Iceland’s Kaupthing Bank bought the shares on behalf of SDI above or below the 195 pence (€2.78-$4.08) per share offered by Nike.
Nike says it has continued to discuss the offer with shareholders, but feels its offering price is fair. Should Nike determine that it cannot secure the necessary approval, it could change the structure of the offer, so it would take a straight majority of just over 50 percent for the takeover to go ahead. Nike still hopes to conclude the deal by early next year. Under British rules, the stake held by SDI would not guarantee any seats on Umbro’s board.
In any case, even now that a few days have passed since his bold move, Ashley’s intentions are as unclear as ever. He may be preparing an full-scale tender offer for Umbro, or he may just be speculating on a counter-bid or a heightened offer by Nike that would earn him a few more million. Should he decide to mount a bid, he would surely seek assurances from the Football Association that it would not exercise its right to cancel the England football team’s sponsorship deal with Umbro. Nike came to such an agreement with the F.A. about the deal, which runs until 2014 and is regarded as one of Umbro’s most valuable assets, but the FA might be less inclined to waive its rights in case of an Umbro acquisition by SDI.
Then again, several analysts suggested that Ashley was building up his stake in Umbro as a means to reinforce his position in negotiations with Nike and Umbro, both leading suppliers for SDI. Some speculated that Ashley was particularly eager to renegotiate orders of Umbro jerseys for the England football team, under a four-year deal that took effect last May. Large sales of such shirts had been anticipated ahead of the 2008 European Championships, but England’s performance has been such that its chances of qualifying now look slim.
Ashley’s investment is regarded as a high-risk strategy, since it threatens to alienate two of Sports World’s leading suppliers. Maintaining a relationship with them is fundamental to the success of SDI’s business model – in which leading brands draw consumers into Sports World stores, generating high-margin sales of products owned or distributed by SDI, like Dunlop, Slazenger, Donnay, Karrimor, Londsdale and now Everlast. Umbro is a weighty supplier for Sports World, which specializes in discounted football replica and had planned to open football shop-in-shops with Umbro in 180 of its stores.
The investment in Umbro didn’t thrill investors as it added to SDI’s debts. Since it was launched on the stock exchange in February, SDI has spent millions on Adidas, Amer and Umbro, not to mention its own shares, amassing debts of an estimated £600 million (€855m-$1,245m).
Partly to address this problem, SDI sold off its stake in Amer Sports this month, netting £116 million (€165.3m-$240.7m). This represented a profit of around £25 million (€35.6m-$51.9m) since it started to buy into the Finnish group in June and raised its stake to about 12 percent in September. SDI stated that the divestment was consistent with its policy of keeping investments as long as they benefit the company – although it remains unclear why this was the case in June but not in November.
Analysts deemed it unlikely that Nike would raise its offer for Umbro, which was in line with the valuation of Reebok by Adidas, for example. While the acquisition of Umbro would give Nike market leadership in the football business, this advantage is offset by the cyclical and uncertain aspects of the business, as illustrated by the latest England disaster.
While puzzling analysts, SDI’s increased stake in Umbro has reportedly raised other concerns at the Takeover Panel. The Independent suggested last week that this watchdog might want to investigate if SDI was acting in concert with JJB Sports. The U.K.’s second-largest retailer, JJB is SDI’s leading rival, but the company has been run since August by one of Ashley’s longtime friends and former employees, Chris Ronnie. JJB has recently acquired a stake of 10.12 percent in Umbro, explaining at the time that it wanted a “seat at the table.” Football jerseys make up about 13 percent of JJB’s sales and the retailer had planned to set up Umbro shop-in-shops in about 50 of its stores by the end of the year.
Separately, Umbro has extended two partnerships in Sweden. Its Swedish licensee, the New Wave Group, has been confirmed until 2013, and the company has extended its endorsement deal with the Swedish football federation until 2012. Umbro has pledged to increase its marketing budget for the federation, which teamed up with Umbro in 2002.
