Proposed Related Party Acquisition

RNS Number : 2118M

Sports Direct International Plc

11 August 2011

 



11 August 2011

Sports Direct International plc

Proposed Related Party Acquisition of Properties

&

Notice of General Meeting

Proposed Related Party Acquisition of Properties

Introduction

Sports Direct International plc ("Sports Direct" or the "Company"), the UK's leading sports retailer, today announces that it has conditionally agreed, subject to shareholder approval, to acquire a portfolio of 32 freehold and long leasehold properties (the "Properties") from Mr Michael Ashley, a director and shareholder of the Company, for an aggregate consideration of £86.8m (collectively the "Proposed Acquisition").

Historically, the Sports Direct Group (the "Group") has primarily traded from leasehold properties in the UK. Most of the Group's landlords are independent third party institutions but Sportsdirect.com Retail Limited, a subsidiary of the Company, trades from 32 premises where, directly or indirectly, the freehold or long leasehold interest is owned by Michael Ashley. Michael Ashley is the Executive Deputy Chairman of the Group and a director of Sports Direct.

The directors, other than Michael Ashley (collectively the "Independent Directors"), have concluded that it would be advantageous for the Group to own the freehold (or long leasehold) interest in a significant number of the properties from which the Group trades. The Company has therefore conditionally agreed with Michael Ashley to acquire the Properties for £86.8 million.

The Proposed Acquisition will be financed through the utilisation of the Company's existing cash resources and banking facilities.

As Michael Ashley is a director and a substantial shareholder of the Company, the Proposed Acquisition is a related party transaction for the purposes of Chapter 11 of the Listing Rules and a substantial property transaction involving a director for the purposes of the Companies Act 2006. As such, the Proposed Acquisition requires shareholder approval. In accordance with the Listing Rules, Michael Ashley will not vote on the resolution (the "Resolution") to be proposed at the general meeting (the "General Meeting") to consider the Proposed Acquisition. Michael Ashley has also undertaken to take all reasonable steps to ensure that his respective associates will not vote on the Resolution.

Background to and benefits of the Proposed Acquisition

The Group has a portfolio of 394 stores in the UK (excluding Northern Ireland) of which the Group owns 16 freehold premises and one long leasehold. Excluding the 32 Properties being acquired, 346 premises are leasehold premises, which includes 324 leases of between five and 25 years duration and 21 temporary short leases. The leasehold premises are generally subject to periodic rent reviews, lease expiries and negotiations with landlords relating to the increase in market rents.

The Company has in the past purchased freehold or long leasehold premises where suitable acquisition targets have arisen. Since 2007, the Company has spent approximately £100 million on the acquisition of 16 freehold properties in the UK.  The Group currently owns the freehold to 16 trading properties and three non-trading premises in the UK and four freehold premises in mainland Europe. The Proposed Acquistion is therefore a continuation of the Group's policy to pursue strategic acquisition opportunities of freehold interests in premises where appropriate and practicable.

The Group currently occupies 29 of the Properties the subject of the Proposed Acqusition under the terms of five year lease agreements dated 2 March 2007, one of the Properties under a lease dated 23 April 2007 and two of the Properties under implied leases which commenced on 2 March 2007. The Company has agreed with Michael Ashley to acquire from him the Properties at original cost for an aggregate consideration of £86.8 million which, shall be payable in cash at completion.

The Properties have been independently valued by CB Richard Ellis Limited as at 30 June 2011 in accordance with The RICS Valuation Standards, Seventh Edition ("The Red Book").

In accordance with the requirements of The Red Book, the Properties have been valued on a vacant possession basis, regardless of the fact that Sports Direct currently occupies the  Properties. This valuation shows the Properties to be worth, on that basis, £54 million. However, the Independent Directors consider that, if the 32 Properties were valued on the basis they were occupied and leased on 10 to 15 year leases at typical market rents and commercial terms, and this was taken into account in the valuation, the 32 Properties would be valued at approximately £75 to £80 million. The Independent Directors have considered information in respect of market rents and commercial terms, to support this indicative valuation.

The Independent Directors consider that the purchase price of £86.8 million is a fair and reasonable price and is in the best interests of the Company and the shareholders as a whole and will benefit the Group for the reasons outlined below:

a)     the acquisition of the Properties will provide the Group with greater security by ensuring the availability of the premises for trading, greater flexibility over the management of its property interests and will provide the Group with a long-term solution to its property arrangements;

b)     the Properties have been occupied by Sportsdirect.com Retail Limited for an average of approximately five years and generated revenues of £66 million and gross profit of £29 million in the year ended 24 April 2011. The stores are therefore of commercial significance to the Group as they have developed significant customer and brand loyalty in their respective locations, which would be difficult to replicate in the short term if the stores were forced to re-locate.

c)     in the year ending 24 April 2011, the Group paid rent of £3.3 million on the Properties occupied by Sportsdirect.com Retail Limited. Subject to completion of the Acquisition, the estimated savings in rent payable net of any additional costs that may be incurred relating to the Properties will be approximately £3.3 million per annum. Additionally approximately £2 million in rent is currently paid in respect of the Properties occupied by third parties and which following completion of the Proposed Acquisition, would be received by the Group;

d)     the leases on the Properties are due for renewal on 1 March 2012. Under the current lease arrangements, the annual rent payable under these leases has amounted to approximately five per cent. of turnover. On renewal the Group could expect to pay in excess of seven and a half per cent. of turnover on the same basis. On other properties in the UK, leased from independent third party landlords, the annual rent payable is approximately seven and a half per cent. of turnover;

e)     the acquisition of the Properties will increase the fixed assets of the Group, enhance the earnings per share, and be cash flow positive for the Group; and

f)      by acquiring the Properties, the Company will benefit from any increase in the value of the land as well as removing any potential conflict between Michael Ashley and the Group.

Principal terms and conditions of the Proposed Acquisition

The 32 Properties will be acquired through two agreements (the "Acquisition Agreements"). The Glasgow Premises will be purchased through the purchase of the entire issued share capital of Stirlings (Argyle Street) Limited (the "Glasgow Agreement"). The Glasgow Agreement will be entered into between Michael Ashley and SDI Property Limited ("SDI Property"), a wholly owned subsidiary of the Company. The remaining Properties will be acquired under the terms of a property sale agreement (the "Property Agreement") to be entered into between Michael Ashley and SDI Property. 

Both Acquisition Agreements will be conditional upon the passing of the Resolution at the General Meeting. If the Resolution is not passed by 1 November 2011, the Acquisition Agreements will terminate.

The total consideration payable by SDI Property under the Glasgow Agreement will be £2,900,000 and the total consideration payable by SDI Property under the Property Agreement will be £83,899,000

Completion of the Acquisition Agreements is expected to take place on 1 March 2012 following approval by shareholders of the Proposed Acquisition at the General Meeting proposed to be held on 7 September 2011.

Letters of Intent

The Company has received letters of intent from shareholders, who in aggregate hold 49,916,113 shares representing 8.66 per cent. of the total voting rights of the Company and 30.03 per cent. of those ordinary shares of which voting rights may be exercised in relation to the Resolution.

Circular to Shareholders

A shareholder circular (the "Circular") providing full details of the Proposed Acquisition has today been posted to shareholders and is available from the Company's website.

Notice of General Meeting

A General Meeting has been convened for 3.30 p.m. (or at such later time following the conclusion  of the Company's annual general meeting scheduled for the same day) on 7 September 2011 at which shareholders will be asked to consider and, if thought fit, approve the Resolution to approve the Proposed Acquisition. Details of the General Meeting, and the Resolution to be considered, are set out in the Notice of General Meeting at the end of the Circular.

For further information, please contact:

Sports Direct International plc Dave Forsey, Chief Executive Bob Mellors, Group Finance Director	T. 0845 129 9229
Financial Dynamics Jonathon Brill Caroline Stewart Alex Beagley	T. 0207 831 3113

 

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