Newcastle United owner Mike Ashley's Sports Direct has made a £43m (€55m) bet that Tesco shares have fallen too far following this week's profit warning.
Britain's biggest sporting goods retailer said yesterday that it had entered into a put option agreement on a small stake in Tesco, betting that shares in the embattled supermarket chain will rise.
Tesco is in turmoil after revealing on Monday accounting errors that led it to overstate its first half profit forecast by £250m (€320m), forcing it to cut its profit outlook for the third time in two months. Shares in the supermarket are down 46pc on a year ago.
"This investment reflects Sports Direct's growing relationship with Tesco and belief in Tesco's long-term future," said Sports Direct, which is controlled by billionaire founder and Newcastle United football club owner Mike Ashley.
Earlier this year, Mr Ashley made an unsuccessful bid to buy the Elverys Sports retail chain here.
Sports Direct made a similar bet to the Tesco move on British department store Debenhams in January. It said the agreement with Goldman Sachs referenced 23 million Tesco shares, or a 0.28pc stake in the company. Shares were trading at £1.95 yesterday.
Under the deal, if Tesco shares fall below a pre-set exercise price in the future, Sports Direct will have to buy the stake at the agreed price, or pay the cash difference between the share price and the exercise price.
However, Sports Direct will receive a premium if Tesco shares rise above the exercise price when it expires and said it would have no further obligations.
It said its maximum exposure under the option was about £43m. Sports Direct would not say when the option would expire or what the exercise price was.
Both Tesco and Sports Direct shares were broadly flat in early trade yesterday. In April, an Examiner appointed over debts owed to Nama rejected Mike Ashley's offer for Elverys in favour of a management led deal. (additional reporting Reuters)