Frasers/Mike Ashley: options deal may leave Hugo Boss feeling put out

City mythology recounts that sportswear tycoon Mike Ashley once played the bluffing game Liar’s Poker with a banker over a £200,000 legal bill. Frasers Group, the retail group he controls, might then be at pains to define a €900mn exposure to Hugo Boss as a “strategic investment”.

But for most businesses, a strategic stake consists of a long position in cash equities with no explicit sell-by date. Frasers’ exposure involves a thumping great derivatives position. It is reasonable to suppose this may have a time limit.

Frasers has upped its holding in the plodding German fashion group to 4.9 per cent of the shares. It has nearly doubled its nominal stake, to 26 per cent, by selling put options. This means another investor — probably a big investment bank — has bought the right to sell Frasers bundles of Hugo Boss shares at fixed prices in the future.

This would be worthwhile if the market price of Hugo Boss, currently €49 per share, drops below a typical fixed price of about €40, Lex calculates. That is the figure which pops up when you deduct the cash stake from €900mn and divide the balance by the 18.3mn shares covered by put options.

Ashley enjoys side investments in retailing. Sometimes they come to naught, as with his put option plays on Tesco in late 2014.

Hugo Boss has a rather closer relationship with Frasers. The UK retailer is one of the fashion brand’s top 10 wholesale accounts worldwide. Britain is a top three market for Hugo Boss. Its shift from formal wear to more casual lines suits Frasers, which aims to covers the spectrum from high fashion to affordable lines.

The vote of confidence should be welcome for Hugo Boss, albeit from a retailer lacking the luxury credentials it craves. Yet the solidity of the tie-in is questionable. The defining details of the 31 per cent exposure are not clear. Hugo Boss itself might wish for greater public disclosure.