Friday tips round-up: Sports Direct, Direct Line

26th Sep 2014 11:59

Sports Direct's decision to sell 'put' options on 23m shares of Tesco to Goldman Sachs is tantamount to a bet that the grocer's shares will not fall further. Fortunately, the strike price for those derivatives seems to lie close to Tesco's current share price, as the firm said that its total exposure is £43m. Hence, the worst case scenario is that founder Mike Ashley is forced to buy the stock near current levels. Even so, orthodox managers would be aghast at what Ashley has just done with the company's monies. He is supposed to be focusing on selling football shirts and the like, not speculating in capital markets. If shareholders want to buy Tesco they can choose to do so themselves, if they are given their money back. However, what Ashley has done is far less reproachable than what many companies usually do through their share buy-back schemes, which typically involve vastly larger amounts. Furthermore, most management teams tend to carry out buybacks in a cyclical manner, in effect destroying wealth, says the Financial Times' Lex column.The decision of insurer Direct Line to sell its European businesses was expected, but not so the price it fetched for them. It came in ahead of all expectations. The company will raise £430.5m in proceeds versus the between £225m and £300m which different analysts had been anticipating. Once heavy one-off claims in Germany are excluded, its operations in both Italy and Germany are being hived off for 37 times earnings to Spanish rival Mapfre. Given that at least one analyst described them as "strategically challenged", this comes as a pleasant surprise. Just as important, Direct Line is now left as a purely UK-focused outfit comitted to returning excess capital to shareholders. Given the company's high capital coverage ratio, the entire proceeds from the sale may be funnelled back to investors. There is also scope for cost savings above and beyond what was expected at the time of the float. "Direct Line shares offer a yield of 4.4% on their ordinary dividends alone. This seems all the reason investors should need to hold them," says The Times's Tempus.