Dixons and Carphone Warehouse £3.8bn Merger Gets Lukewarm Reception

UK retail giants Dixons, the owner of Currys and PC World, and the mobile phone seller Carphone Warehouse have announced a merger deal worth £3.8bn (US$6bn), but market reaction was initially negative with both firms’ share prices tumbling.

Known as Dixons Carphone ownership of the new firm will be split equally between the two firms’ shareholders, but market reaction to the idea of two shop-based giants linking up to focus on selling connectivity packages in the coming era of the ‘internet of things’ was initially bad with Dixons shares closing down 10.3% yesterday and Carphone’s 8%.

Early morning trading shows analysts are still to be convinced the merger can work, with the latter’s failed link-up with US retailer Best Buy perhaps still fresh in investors’ minds. That ill-fated venture ended in 2011 when Best Buy returned to America having misunderstood the shopping habits of British consumers.

News Analysis: UK Retail Giants Face Net Threat

The rationale of merging Dixons retail park electrical goods stores with Carphone Warehouse’s UK High Street based shops, and using its mobile customer base to sell connectivity packages to control fridges, TVs, heating and everything else electrical brought from its new partner, makes sense. However, it does not make an online rival to Amazon and analysts speculated that Dixons’ 500 Currys and PC World shops in the UK and Ireland, plus Carphone’s 2,000 stores across Europe, would remain an expensive property burden for the business in the future.

Only £80m a year of synergy savings for the 2017-18 fiscal year have so far been identified and no store closures are planned. Carphone Warehouse claimed approximately 4% of jobs may be added to beef up sales, installation and other functions, but Dixons admitted the rationalisation of operational and support functions would result in a 2% job loss out of the tens of thousands of staff jointly employed.

Discussions about a link-up began in February this year with the formal announcement coming on 15 May as Dixons chief executive, Sebastian James, unveiled his firm’s trading performance for the financial year, with underlying sales up 3% and like-for-like sales, stripping out the effect of new store openings, also up 3%. Dixons said its full-year profit was expected to be “at the top end of market expectations” of £150m to £160m.

“It is good to be in such a strong position as we embark on this adventure,” James told ‘BBC TV’. “The ability to take what we have built in electrical retailing and add the expertise of Carphone Warehouse in connectivity will make us a leading force in retailing for a connected world.”

Strong M&A Trend Evident

Dixons Retail owns the Elkjop group in the Nordic region and the Kotsovolos retail business in Greece. It sold the loss-making online retail business Pixmania last year to German industrial group Mutares and also divested subsidiaries in Italy and Turkey as part of a strategy to focus on its core markets where it has a leadership position. Carphone Warehouse has lacked a partner since its split with Best Buy, which improved its cash position after buying back its stake at a reduced rate, but left it strategically weak.

The consumer retailers’ deal is part of a strong merger and acquisition (M&A) trend evident at the moment as financiers seek to prepare themselves for an anticipated period of economic expansion after years of recession or stagnation in developed ‘western’ markets. The on-going £63bn (US$100bn) Pfizer bid to take over UK/Swedish pharmaceutical giant AstraZeneca is just one such example.

The continuing low internet rate environment and era of ‘cheap money’, which is not expected to last if recovery truly takes off, is a driver for corporate financers, treasurers and boardrooms looking to strike deals now.

Warwick Business School Professor Mark Skilton warned that “the increasing commoditisation of the consumer market in electronics, lifestyle and home appliances is rapidly changing the nature of these products and services” and that making the merged Dixons Carphone entity a success would not be easy. “Both are facing diminishing demand that this merger is aiming to fix … but it will require some deft management skills and product-partner strategies to make it work.”


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