15th May 2014 13:44
LONDON (Alliance News) - Electronics retailer Dixons Retail PLC and mobile phone retailer Carphone Warehouse Group PLC Thursday said they have agreed to merge in a GBP3.6 billion deal that will create the UK's biggest retailer of mobile phones and electrical goods.
The companies said the aim of the deal is to cut the number of stores by amalgamating their electrical and phone stores into a joint offering, and to home in on the growing trend of connected devices, as smartphones become increasingly used to control everything from thermostats at home, to lighting and streaming music across homes. The companies also aim to roll-out the biggest click-and-collect network for technology products across the UK.
"Simply having stores that just sell mobile handsets, or simply selling electrical goods or handsets that can communicate with other devices but not solving the issue of making them communicate, is actually missing the point for customers. So what we are trying to do here quite simply, is anticipate the issues and needs that customers have," Carphone Warehouse Chairman Charles Dunstone told a press conference held at The Shard in London.
In a joint statement Thursday, the companies said the shareholders of the two companies will have equal shares in the new company, which will be called Dixons Carphone PLC.
The companies say the deal will create "a new retailer for a new digital age".
"Content and connectivity are increasingly important, and with Carphone Warehouse we will provide that. This makes us very powerful," Dixons Retail Chief Executive Sebastian James told journalists at the press conference Thursday.
"We're complimentary. We don't do the same thing, and it is a fantastic time to get together. We are the market leaders in respective our spaces. Markets are emerging, and we are converging. It's as simply as that," said James.
While they said that the details are still to be ironed out, and trial and error will follow, the aim of the merger is for the new Dixons Carphone format to integrate Carphone's mobile offering into Dixons' store portfolio. Dixons said that it will continue to reduce its UK store portfolio.
"We don't yet know to what extent us being together means for consolidating stores. We are going to trial things and see what happens," said James.
Dixons is the UK's largest electrical retailer, selling everything from laptops and TV's, to washing machines and refrigerators from its Currys PC World stores. Carphone Warehouse on the other hand is a specialist mobile phone retailer, which means that neither company were previously in competition with the other. Dixons also currently operates many of its stores in out-of-town retail parks, due to the size of its product offering, whereas Carphone Warehouse is predominantly on UK high streets.
"There's always a risk with mergers that you can end up destroying things as well as creating things. We don't want to throw the baby out of the bath water, and we want to keep what's special and both organisations," said Carphone's Dunstone.
The press conference was jointly held by both management teams, at which they described how the new merger will mean a converging of markets, improved scale and reach, significant synergies and a platform for services growth.
The companies think they will be able to achieve integrated mobile retailing and procurement synergies, together with cost savings, of at least GBP80 million on a recurring basis, with almost half coming by the 2015/16 financial year and the full benefits being felt from 2017/18.
It said that half of these synergies will come from integrating Carphone's mobile offering into Dixons shops, with the other coming from corporate infrastructure synergies, such operating from one head office rather than two.
The companies also said that jobs will be creating through the roll-out of the Dixons Carphone integrated retail offering, with a net increase of around 2% of the combined group's full-time equivalent employees as a result of the merger.
Dixons Retail currently operates more than 940 stores in over nine countries, while Carphone Warehouse has over 2,00 stores in seven countries.
The merger will see the enlarged group with combined revenues of around GBP11 billion based on market consensus forecasts for the two companies for their financial years just ended.
"We've got a real set of brands, so that we have to choose what we're going to do with in the future, but for the moment, we're going to keep those brands, and think over time what are the best brands to go to market with," the companies said.
The digital era and the way people use technology and products are changing. Mobile phones are now used to choose and stream music in different rooms in the home. Home thermostats can be controlled by mobile phones, as can be smoke alarms, security systems, locks and lighting.
"What seems outlandish today, I think will become absolutely ubiquitous in the next few years, and we will be at the heart of the selling, installation, the management and the 'keeping-working' of all these devices that are connected," said James.
The companies said they are looking to drive added-value services. In terms of customer services, Dixons Retail has what its calls 'Knowhow', while Carphone has 'Geek Squad'. Both are designed to help customers with installations, set up, support and repair.
"People want technology that is working. What were are finding with the growth of KnowHow and growth of Geek Squad is that customers will pay for a service which ensures the the technology does what they bought it for, and we think there is much more opportunity for that," James said.
The shape of the new board sees Carphone's Dunstone becoming the chairman of combined company, while Dixons' James becomes CEO. Carphone Chief Executive Andrew Harrison will become deputy CEO.
However, the equality of the deal - both companies have market capitalisations of about GBP1.8 billion - has led analysts to question who will take the driving seat in the integration process.
"Dixons? share price has performed strongly over the last couple of years having made excellent progress, and we view the tie up with Carphone as a positive move in this dynamic market place," said WH Ireland analyst John Cummins in a research note.
The two companies had revealed back in February that they were in merger talks less than a year after Carphone Warehouse extricated itself from a failed joint venture with Best Buy of the US. It comes as traditional retailers, particularly those in the electronics sector, face increasing competition from online retailers.
"Carphone and Dixons are both experienced operators with significant knowledge and expertise. The integration of the two businesses will be managed by a dedicated integration team, bringing together the best relevant capabilities of both businesses, with the aim of facilitating a smooth integration," the companies said in their statement Thursday.
Dixons Retail has spent several years turning itself around after over-expanding and then being hit hard by expanding online competition and the economic crisis. It was helped when rival Comet went into administration at the end of 2012. It has shed loss-making businesses such as Pixmania in France, Electroworld in Turkey and Unieuro in Italy, and reacted to the challenge of online competitors in the UK by slashing costs, and bringing down the price of its own goods closer to those of e-tailers like Amazon. It has also improved its own online platform.
In a separate statement Thursday, Dixons Retail said that underlying sales were up 3% in the year ended April 30, as well as on a like-for-like basis. It said it expects to report full-year underlying pretax profit at the top end of market expectations of GBP150 million to GBP160 million.
Carphone Warehouse, meanwhile, did well out of the deal it struck with Best Buy. The US electronics retailing giant, which is similar to Dixons, paid Carphone GBP1.1 billion for a 50% stake in the British company's retail unit as they set up a joint venture in 2008. However, Best Buy retreated from Europe just five years later, selling back the stake for less than half the initial investment. Carphone then decided to shutter the joint venture stores they'd opened, focusing instead on selling more electronics goods from its phone stores.
The Dixons Carphone merger is conditional on the approval of shareholders from both companies and on normal regulatory approvals and anti-trust clearances. It said that if its receives all the necessary approvals, it expects the merger to become effective by the third quarter of the current financial year.
The companies said they expect to incur one-off exceptional costs of between GBPP55 million to GBP60 million in order to realise the synergies, most of which it said will be booked by the end of the financial year 2015/16. They also said they are expecting incremental capital expenditure of GBP60 million to GBP70 million by the financial year end 2017/18.
"Carphone and Dixons have put in place appropriate banking facilities to ensure that Dixons Carphone will have a strong financial profile following completion, which will enable the combined Group to retain flexibility whilst reviewing its optimal capital structure going forward," the companies said in a statement.
They said that the combined entity intends to adopt a dividend policy targeting dividend cover of around three times.
Carphone Deputy Chairman Roger Taylor and Dixons Chairman John Allan will become co-deputy chairmen of the new company,
Under the terms of the merger, Dixons shareholders will receive 0.155 of a new Dixons Carphone share, in exchange for each Dixons Retail share.
Dixons was advised by Citigroup Inc on the deal, while Carphone Warehouse was advised by Deutsche Bank AG.
Dixons shares were down 6.4% at 47.65 pence Thursday afternoon, one of the biggest declines on the FTSE 250, while Carphone Warehouse shares were down 4.4% at 313.50 pence, also among the biggest fallers. Both stocks had risen initially on confirmation of the deal.
By Rowena Harris-Doughty; [email protected]; @rharrisdoughty
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