News Column

Carphone Warehouse and Dixons agree pounds 3.8bn merger: New retailer to sell gadgets and phone-linked services Shares fall as fears raised about joint leadership

May 16, 2014

Juliette Garside and Sean Farrell



Carphone Warehouse and Dixons have agreed a pounds 3.8bn "merger of equals" to create an electricals retailer selling phones to fridges, and offering service and support alongside a multitude of gadgets.

With 3,000 stores and sales of almost pounds 11bn, the new company, called Dixons Carphone, will bring the household names Currys, PC World and Carphone Warehouse under one umbrella.

The combined entity plans to do more than just sell phones, computers and appliances. It aims to branch into domestic heating, lighting and security services - all controlled by mobile phone.

Carphone and Dixons said the new firm would benefit from greater buying power, extra growth options and annual savings of at least pounds 80m within three years.

It also hopes to retail the combined broadband, pay TV and phone services offered by operators such as BT and Virgin, and to take commissions from supermarkets or music services for pre-installing their apps on smartphones.

Using Carphone's Geek Squad tech support teams, Dixons Carphone aims to stand alongside road rescue groups the AA and RAC as "an emergency service for the connected world", according to Harrison. The promise is for an end-to-end service, from sales to set-up advice, service, insurance, repairs and recycling.

Dixons and Carphone shareholders will each own 50% of the combined group under the deal, and Carphone concessions will be built into every Dixons outlet.

In a leadership compromise, Carphone's chairman and founder, Sir Charles Dunstone, will lead a 14-strong board that also includes two deputy chairmen, a chief executive, a deputy chief executive and a senior non-executive director. Dixons' boss, Sebastian James, will be chief executive, while Andrew Harrison of Carphone Warehouse becomes his deputy.

"This is a genuine merger of equals founded on core strategic principles rather than straight cost cuts," said James, presenting the merger deal at London's Shard skyscraper yesterday. "We do things that are so adjacent that it makes sense to come together. Our markets are converging, and we are converging."

The companies first announced their merger talks in February, although informal discussions about a possible tie-up began four years ago. Dunstone said: "We see the merger of these two great companies as an opportunity to bring our skills together for the consumer and create a new retailer for the digital age."

But both companies are grappling with structural changes as sales move online. Amazon has squeezed margins at Dixons, while the recent arrival AO.com plans to branch out from its white goods heartland into selling televisions.

Electricals retailers are in danger of following book and record stores into high street oblivion. Comet was recently pushed into receivership, while Carphone's short-lived attempt to sell electricals with Best Buy ended in failure.

Meanwhile, mobile networks would like to sell more through their own shops and so pay less commission to Carphone, and Apple does very well selling phones through its retail spaces.

One independent analyst, Louise Cooper, was unimpressed with the deal: "Two past-their-sell-by-date retailers merging does not an Amazon make." She also criticised the top-heavy leadership structure: "Executives are not leading from the front. Mostly they are retaining their jobs. That is the wrong message."

Investors appeared to agree, sending shares in both firms plummeting, with Dixons down nearly 10% to 46p a share, and Carphone down more than 7% to 303p.

"Concerns remain that the emphasis on equality in the merger may be masking indecision over who should take charge," said David Alexander at the retail researcher Columino.

The companies said they would cut about 2% of their combined workforce to reduce costs but that they would add 4% to exploit growth opportunities, leading to a net 2% increase in staff.

Under the terms of the merger, Dixons shareholders will receive 0.155 of a new Dixons Carphone share in exchange for each Dixons share. Dunstone's 23.5% share in Carphone will be halved to 11.75% in the new company.

At Wednesday's closing prices, Carphone's market capitalisation was pounds 1.9bn and Dixons' was pounds 1.87bn. The combined company is likely to join the FTSE 100.



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Source: Guardian (UK)


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