Sports Direct’s choice — reform or a red card

The social licence that a business leader needs to operate is no less real for lacking a physical form. It seems Mike Ashley, maverick founder of sportswear retailer Sports Direct, is about to lose his permit. Investors, politicians, unions and business groups are demanding Sports Direct changes its ways after allegations of sharp labour practices.

The newest broadside against Mr Ashley comes from one of his oldest critics: the City of London. The Investor Forum has called on Sports Direct to launch an independent review of corporate governance at the company, whose shares have fallen 62 per cent in a year.

So far, so toothless. One of the few sanctions City investors can muster is to vote against the reappointment of three independent non-executive directors at Sports Direct’s annual meeting on September 7. Even then, Mr Ashley is free to deploy his 55 per cent shareholding to keep them on board.

A controlling stake has permitted the burly former squash coach to thumb his nose at the Square Mile ever since Sports Direct listed in 2007. He holds the weird title of executive deputy chairman so he can run the company with little direct accountability.

The intervention of the Investor Forum matters, however, because the forces massing against Mr Ashley are beginning to look overwhelming. Last month, a committee of MPs likened conditions at Sports Direct’s Shirebrook warehouse to “a Victorian workhouse”. The British media is in gleeful pursuit of Mr Ashley, too.

Opprobrium for controversial bankers, energy bosses and manufacturing chiefs have in the past forced them to withdraw from public life. Mr Ashley’s appearance before MPs showed how vulnerable he is. He stumbled red-faced through the hearing, admitting his knowledge of his business was often poor.

Mr Ashley’s licence to operate depended on two bargains. First, he had to sell clothes at rock-bottom prices without extreme or visible nickel-and-diming of workers. Second, he had to deliver financial performance good enough for minority investors to put up with Sports Direct’s unconventional governance.

Having failed on both counts, he should step back to an advisory role at Sports Direct. Old lieutenants, such as chief executive David Forsey, should give way to managers with the experience needed to regularise governance and employment practices. If Mr Ashley decides instead to fight it out, the UK establishment will make life very hot indeed for him.

Rock star

CRH is a lean, green M&A machine. The Irish building materials group has specialised in buying small “mom ’n’ pop” rivals affordably, then cutting their costs. It is less risky than making big acquisitions. So investors held their breath when CRH bought a bunch of assets for €6.5bn from Lafarge and Holcim last year.

CRH is avoiding value traps, judging from full-year results. Pro-forma underlying earnings were 20 per cent higher at €1.1bn. Debt was a steep €7bn, but should fall to two times earnings by year end. Next year the company will be back to bolt-on buying, says chief executive Albert Manifold, a big man running a big company for big rewards.

Lombard opined CRH was the kind of business you could invite home to meet the family when it switched its primary listing to London in 2011. So it has proved. The shares have doubled. At more than 17 times earnings they are now expensive, given the vulnerability of US construction to rate rises and the feebleness of European growth.

Pork talk

Cheery kids character Peppa Pig is the key asset of media group EntertainmentOne. But ITV’s decision to walk away from a £1bn takeover suggests the film and TV company draws greater inspiration from Miss Piggy, who once said: “I would like everyone to take a moment, a single moment out of their busy day, to think how lucky they are to know ME!”

ITV, whose shares have been depressed by worries over terrestrial advertising revenue, had mooted an offer at 236p per share. A statement from the broadcaster implies it was ready to go higher, given a look at eOne’s books, but this was not forthcoming. However it seems unlikely ITV would have contemplated bidding at 260p-280p, the takeout range suggested by Peel Hunt.

While eOne has produced steadily rising earnings of the kind that strip out all manner of expenses, its generation of free cash has been disappointing. That will have been a mood killer for ITV. The gap between the expectations of chief executive Adam Crozier and eOne investors who bought in at around 290p, before shares slumped, was too wide to bridge. Mr Crozier can be forgiven for failing to bring home the bacon.

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BDC 311 : Dec 2023