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On 3 July, Frasers Group (LSE:FRAS), the FTSE 250 owner of Sports Direct, announced that it had secured a new term loan and credit facility worth up to £3.5bn.
This replaces its existing £1.65bn facility, of which £1.15bn had been drawn down at 27 October 2024. Assuming nothing’s changed, there’s potentially another £2.35bn available to the group.
But why does Frasers need extra borrowing capacity?
It might be a case of building up a bigger ‘rainy day’ fund. Retailing is a tough business, especially for a group that operates over 1,500 physical stores in the UK. And the April increase in the Living Wage and employer’s National Insurance has added £50m to the group’s costs this year.
Alternatively, Frasers might want to increase its minority stakes in other listed businesses. Although its roots are in fashion, its interests now extend to online beauty and electrical retailing.
A massive incentive
It’s interesting to me that four years ago, the group agreed a remuneration package with its chief executive, Michael Murray.
Under its terms, he’s entitled to share options worth £100m if the group’s share price hits £15 by October 2025 and remains above this level for 30 consecutive dealing days.
But I think it’s significant that Murray’s waived his £1m salary, especially given that the group (income investors look away now) doesn’t pay a dividend. It’s a case of ‘all or nothing’ for the man in charge.
Something transformational
The share price is nowhere near that as of today (10 July) but the additional funding could be used to buy another significant business, one that could transform the size and scale of Frasers. Doing so wouldn’t theoretically happen overnight and the share price more than doubling wouldn’t either, unless there was a big target already in sight.
Based on the group’s 10-year average earnings multiple of 10.4, it would need an annual post-tax profit of around £650m to get its share price to £15. That’s approximately £215m more than analysts are expecting for FY25. How might it do this? I reckon Frasers could use £2bn of its £2.35bn to buy the 80% of Hugo Boss (one of its minority interests referred to earlier) that it doesn’t already own. Doing this would add £200m to the group’s profit.
Cynics might suggest that if Murray fails, the bonus target will be extended. After all, his father-in-law, Mike Ashley, owns more than 70% of the company. But the group’s independent remuneration committee has to sign-off any deal and it’s clear that Murray has spent several years in charge focused on what’s best for the company regardless.
On reflection…
Ignoring the bonus issue, I think there are reasons why investors should keep an eye on the group. Not least, its impressive track record of growth. FY24 revenue was 40% higher than FY20’s. And its operating margin more than doubled.
Also, despite the additional employment costs, brokers are expecting earnings per share to increase by 23% over the next three years. And their average 12-month share price target is 32% higher than today’s price. Of course, these forecasts may be wrong but they do suggest a high degree of optimism about the group’s prospects.
This is why I own shares in Frasers. And why I think others could consider adding the stock to their own portfolios.
