A Merger That Actually Worked

Amazon is still a threat, but British retailer is doing much more than playing defense

When Dixons and Carphone Warehouse agreed to merge in May 2014, it looked like a classic defensive deal done from a position of weakness.

A year-and-a-half later it seems anything but. The combined electrical goods and mobile phone retailer appears to have pulled off that rarest of feats: a merger that actually worked.

Dixons Carphone on Tuesday reported sales figures showing it was one of the winners over the holiday trading season, thanks to Britons' appetite for everything from smartphones and flat-screen TVs to Nutribullet smoothie-makers.

Sales from stores open at least a year rose 5 percent in the 10 weeks to January 9, with full-year pretax profit excluding goodwill, amortization and exceptional items expected to be between 440 million pounds ($625 million) and 450 million pounds, slightly ahead of consensus.


Dixons Carphone's same-store sales growth in 10 weeks to January 9th exceeded expectations


The combination of ebullient CEO Sebastian James and his deputy, long-time Carphone executive Andrew Harrison, seems to be working well. So well in fact that they expect to deliver a promised 80 million pounds of merger benefits -- about 40 million pounds of cost savings and 40 million pounds of extra revenues -- a year early.

It’s a different picture from when the deal was announced. The board looked top-heavy, raising the prospect of bust-ups, while the timing of the savings looked unambitious and the store estate unwieldy.

True, there have been some boardroom changes. Roger Taylor, a long-time ally of Carphone founder Charles Dunstone, and a former Carphone CEO, stepped down in December.

And Dixons Carphone has had luck on its side. British rivals Comet and Phones 4 U have both collapsed over the past couple of years.

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Dixons Carphone has performed well since its merger in August 2014

But that doesn't fully explain the impressive share price rise since the merger was completed in August 2014. The total return for shareholders during that period is 42 percent, compared to a 3.6 percent decline for the FTSE 100 and a 12 percent increase for the FTSE All-Share retailers index. 

The shares trade at about 15 times the next 12 months' earnings, according to data compiled by Bloomberg, a healthy premium to the global electrical retail sector. This is deserved, but looks up with events, particularly as life could get harder from here.

There's no doubt the original combination was defensive, designed to offer some protection against the Amazon juggernaut. And that threat hasn't gone away. In fact, it's only intensified, thanks to the effort the U.S. giant is putting into fast delivery services.

Most of the growth is coming from the Carphone Warehouse side of the business, which sells smartphones, raising questions about the store estate for the old Dixons electrical goods stores. The company is planning to close 134 shops, mostly Dixons or PC World outlets.

But rationalizing property is expensive, and Dixons has made a 70 million-pound provision, including charges for exiting leases. There's also the 50 million pounds needed to create more stores that combine the three brands (Carphone, Dixons and PC World). However, it hopes this will add 20 million pounds to profit in the 2017-2018 financial year.

Meanwhile, if J Sainsbury succeeds in acquiring Argos it could transform one accident-prone rival into a more serious contender. While there's little overlap with the large appliances that Dixons Carphone sells such as refrigerators and washing machines, a Sainsbury-Argos combination would mean more competition for small electrical goods. 

That said, Sainsbury still needs to convince its shareholders that it can make an Argos tie-up work. After all, when it comes to mergers, Dixons Carphone is an exception not the norm.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Andrea Felsted in London at afelsted@bloomberg.net

    To contact the editor responsible for this story:
    James Boxell at jboxell@bloomberg.net

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