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LONDON (Reuters) - Britain's biggest sporting goods retailer Sports Direct (L:SPD) said on Thursday it had entered into a put option agreement on a small stake in Tesco (L:TSCO), betting that shares in the embattled supermarket chain will rise.
Tesco is in turmoil after revealing on Monday accounting errors that led it to overstate its first half profit forecast by 250 million pounds, forcing it to cut its profit outlook for the third time in two months.
Shares in the supermarket are down 46 percent on a year ago.
"This investment reflects Sports Direct's growing relationship with Tesco and belief in Tesco's long-term future," said Sports Direct, controlled by its billionaire founder and Newcastle United soccer club owner Mike Ashley.
Sports Direct, which made a similar bet on British department store Debenhams (L:DEB) in January, said the agreement with Goldman Sachs referenced 23 million Tesco shares, representing a 0.28 percent stake in the world's No. 3 retailer.
Under the deal, if Tesco shares fall below a pre-set exercise price in the future, Sports Direct will have to buy the stake at the agreed price, or pay the cash difference between the share price and the exercise price.
However, Sports Direct will receive a premium if Tesco shares rise above the exercise price when it expires and said it would have no further obligations.
It said its maximum exposure under the option was about 43 million pounds. Sports Direct would not say when the option would expire or what the exercise price was.
Both Tesco and Sports Direct shares were broadly flat in early trade on Thursday.
(Reporting by Neil Maidment; Editing by James Davey and Pravin Char)