Sports Direct International announced earlier this week the acquisition of majority stakes in Sports Eybl & Sports Experts (EAG) and the Sportland International Group, which are the major retail players in Austria, Estonia, Latvia and Lithuania. The move will widen its retail presence outside the U.K. to a total of 18 countries, eight of which are inside the eurozone. It will thus come closer to its goal of covering all the 17 countries that have adopted the euro as their national currency.
Bringing in an additional retail turnover of near €400 million, the acquisitions will greatly expand Sports Direct's international retail operations. They generated sales of £90.6 million (€106.0m-$137.8m) in the six months ended last Oct. 28, up by 11.4 percent in pounds and by 22.6 percent in local currencies as compared to the same period a year earlier. With sales of £853.0 million (€998.0m-$1,296.8m) in the same period including its online store, Sports Direct's retail operations at home are much bigger.
In contrast with what it did in Portugal, where it acquired a 50.1 percent stake in the Megasport chain and renamed its stores Sports Direct, the company will keep the names of the Austrian and Baltic chains. Only a few other details could be learnt about the group's business plan, pending the approval of the transactions by regulatory authorities. A spokesman indicated that Sports Direct plans to market some of the 20 brands in its portfolio - such as Dunlop, Slazenger, Karrimor or Lonsdale – through the Baltic and Austrian chains, ensuring good profit margins. He said that that Sports Direct will also make use of its “good relations” with big sports brands such as Nike, Adidas and Puma.
The leading British sporting goods retailer is apparently paying a low price for a 51 percent stake in EAG, whose financial situation has been described as disastrous. Reportedly, EAG's bankers had set a deadline of today to come up with a solution to its financial problems or lead it into bankruptcy proceedings.
Acting through a wholly owned subsidiary, Sportsdirect.com Retail Ltd., the British company will pay €10.5 million to its current shareholders, including the Eybl family, while investing an additional €30.0 million in subordinated debt. It will act in fact as a banker, providing working capital for the financially starved retailer. Sports Direct's spokesman said that Sports Experts, EAG's more discount-oriented chain, had the biggest problems, and this is where the British company will be able to help it to recover through its own brands, expertise and logistics.
Sports Direct said that, as a group, EAG had a net loss of €20.6 million on sales of €323.8 million in the financial year ended last Aug. 31. Sports Direct and its spokesman decline to disclose EAG's debt levels but said the loss led the company to reach a net liability position of €2.4 million, which stood against gross assets of €166.0 million.
Under the transaction with the Austrian company, which is expected to be completed by July 31, Sports Direct will have the right for five years to acquire the remaining shares in EAG from the Eybl family for €15.5 million, but during the same period, the Eybl family can elect to sell its remaining shares to Sports Direct for €5.0 million. Conversely, starting on Dec. 31, 2019, the Eybl family will have the right to acquire Sports Direct's shares in EAG based on a multiple of its operating earnings before amortization (Ebitda).
Sports Direct gave no indication about the price that it is paying for a 60 percent stake in the Sportland International Group, in a separate transaction due to close at the end of June. Sources indicate that Sportland's owners had previously sounded out other potential buyers, including one of the licensees of Intersport International. Based in Estonia, Sportland is the largest sporting goods retailer in the Baltic countries and has the exclusive distribution of Nike and other brands in this territory.
Sports Direct says that Sportland generated revenues of €61.6 million in the financial year ended Dec. 31, but gave no indication of its profitability. In 2011, Sportland reportedly had an Ebitda of €1.9 million on 10 percent higher revenues of €52.8 million, but suffered a net loss of €3.2 million, which was mostly due to one-time costs related to its exit that year from the Ukrainian market and a writeoff on its former investment in Russia. Sportland sold its stake in a joint venture in Russia in 2009 and closed its former eight stores in Ukraine in 2011, selling its local company to a third party at the end of the year. Sportland had previously retreated from Finland.
Sportland's more recent financial results could not be obtained. Occupying a premium position in the relatively small Baltic sports market, Sportland currently operates 80 stores with a net sales area of around 39,000 square meters in Estonia, Latvia and Lithuania, including some single-brand Nike, O'Neill and Timberland stores and some factory outlets. The company will continue to be managed by its founders, Are Altraja and Anti Kalle. “With Sports Direct's operational expertise and financial support we will be able to expand our product offering, introduce more innovation and further enhance our market leadership in the Baltics,” said Altraja in a prepared statement.
With regard to the Austrian operations, Sports Direct said that Hubert Schenk and Michael Weccardt will respectively remain as the chief financial officer and chief operations officer of Sport Eybl & Sports Experts (SSG), the retail company owned by EAG. Lorin Leitner and other representatives of the Eybl family will sit on the supervisory boards of EAG and its subsidiaries along with representatives of Sport Direct. As previously reported, EAG went through some major changes in the top management recently.
Holding an estimated market share of 25 percent of the Austrian sporting goods market, SSG operates 29 Eybl stores and 26 lower-priced Sports Experts stores in the country. It also has one Eybl store and two Sports Experts units in Germany. Eybl's mega-stores, which average 7,500 m², generate about 49 percent of the group's sales. The smaller Eybl stores, which have an average size of 2,000 m², contribute about 19 percent of the turnover. The balance of 32 percent is represented by Sports Experts.
The Eybl family had been exploring other options through Deloitte in the past few months. It could not be determined whether Intersport's organizations in Austria or Germany had made a bid for EAG, as speculated in the Austrian press. Intersport Germany is still in line to acquire a majority stake in Intersport Austria, as previously reported, independently of Sports Direct's transaction with EAG.
In any case, it seems clear that EAG will no longer have access to Intersport's products and services once it falls under Sports Direct's control. Eybl was a founding member of Intersport Austria, but stopped being a member of the cooperative in 2008. It then reduced its purchases through Intersport Austria and stopped licensing the Intersport brand at the beginning of this year. A spokesperson for EAG did not exclude cooperation with Intersport in the future.
Sports Direct is a shareholder of Sport 2000 International and has a limited supply deal with that retail organization. Dave Forsey, chief executive of Sports Direct, said its new strategic investments will provide such benefits as an increased scale for its international business, growing international awareness of the group's brands and additional expertise in specialist product categories such as winter sports. Sports Direct said it will fund the two transactions from its operating cash flow and existing bank facilities, leaving it still with significant financial flexibility.
Mike Ashley's company acquired some expertise in the winter sports sector last year with the takeover of Ski Warehouse, which operates an online store and four physical ones in the U.K. As already reported SGI Europe, Sports Direct recently moved into Iceland, Spain, Hungary, the Czech Republic and Slovakia opening a few stores in those countries. One of the Slovak stores previously belonged to the Austrian Gigasport chain.
As a retailer, its biggest foreign market so far has been Belgium, where it had 46 stores as of last October, followed by Slovenia and Portugal, each with 15 stores. By that time, it had a total of 127 stores in 12 countries outside the U.K., also including Ireland, the Netherlands, Luxembourg, France and Cyprus. Slovenia and Cyprus with a total sales area of 1,271,000 square feet. It subsequently opened its first store in Spain. Out of the 127 stores, 27 were joint ventures with local retailers in Ireland and Iceland. The pending new acquisitions will give the group a presence also in Austria, Germany and the three Baltic countries.
Financial analysts reportedly shrugged off Sports Direct's latest foray abroad, as the company's price on the London Stock Exchange declined by 1.74 percent to £5.09 on the day of the announcement. One of them felt that the recent spate acquisitions made by the company, including the takeover of some British fashion brands, may distract the management from its core business.