Sports Direct s shares lift following encouraging signals from its share bonus proposal

Sports Direct has announced certain proposals, which the company intends to put forth to shareholders at its next General Meeting (scheduled for April 4^th).

With the company’s shares up some 4.8% (at time of writing), some elements of said proposals look to be sitting well with investors.

Here are the details. The sports goods retailer has announced plans to dole out an additional eight million ordinary shares to executive deputy chairman, Mike Ashley, at current price of 836p – that’s worth around £66m. No, that’s not the exciting part, especially as the merits of such a move as an additional incentive are debatable. Mr Ashley, after all, already owns some 60% of the company.

The caveats, however, that come along with the announcement are certainly attention-worthy.

If shareholders approve the proposal, the shares will vest in July 2018 but only if the company achieves the following: earnings before interest, tax, depreciation and amortisation (EBITDA) of £330m in fiscal 2014; and EBITDA of £410m in 2015.

Additionally, as part of the conditions the company needs to fulfil in order for Mr Ashley to get his hand-out, Sports Direct will need to have a net debt to EBITDA ratio of 1.5x or less at the end of fiscal 2015.

For context, the company’s full-year EBITDA target was £310m, before a charge for bonus share schemes. It’s reasonable, surely, to assume that management at Sports Direct are confident of better-than-expected results.

Not to mention the figure for 2015, which can also be inferred as encouraging as it indicates sustained solid growth for the year ahead.

Meanwhile, Sports Direct’s last-twelve-months’ (LTM) net debt to EBITDA ratio is 0.7x. The net debt to EBITDA target for its fiscal year 2015 provides wiggle room, but not a colossal amount for any sizeable debt-funded deals.

Of course, that’s not to say that it precludes the sports retailer from making further acquisitions but it has seemingly allayed recent concerns that the company might swoop on Debenhams, which has met with trouble of late.

Indeed, chatter regarding a potential takeover of Debenhams by Sports Direct has floated around.  

That talk was ignited following the announcement of a partnership between both companies.

Not to mention the sports retailer’s sale of its 4.6% stake in Debenhams and – at the same time – entering an option agreement which, if exercised, would see Sports Direct hold a 6.6% stake in Debenhams.

So, with the announcement of its bonus share proposal, Sports Direct has caused something of a buzz today (Tuesday 11^th March).

The company’s fundamentals seem sound enough to deliver but now, with such high expectations, it would be very easy to disappoint the market.