Dixons, Carphone to Combine as Smartphones Meet Fridges

Smartphones and refrigerators just got connected.

Dixons Retail Plc, whose Currys chain sells everything from tablets to vacuum cleaners, agreed to an all-share merger of equals with Carphone Warehouse Group Plc, a deal they say will enable them to capitalize on the growth of Internet-enabled devices, such as washing machines controlled from your phone.

The stock market took a less optimistic view of the union between the U.K.’s biggest consumer-electronics retailer and the country’s leading seller of telecommunications products. Dixons shares fell 10 percent in London and Carphone Warehouse dropped 8.1 percent, reducing the companies’ combined value by about 345 million pounds ($589 million) to 3.4 billion pounds.

“Although there are plenty of reasons to view the merger in a positive light, the history of mergers and acquisitions is littered with the corpses of failed unions,” David Alexander, an analyst at researcher Conlumino, said by e-mail.

The retailers are pooling resources as both continue to battle against increasing competition from Web-based retailers. AO World Plc, the U.K. online appliances seller that listed shares in London in February, said today it’s introducing a television offer to go alongside dishwashers and refrigerators.

The merger will also help bolster defenses against mobile-network operators that are seeking to reduce reliance on third-party retailers and open more of their own stores.

Shares Drop

“The motivation behind the deal reflects some of the challenges mobile-phone retailers like Carphone Warehouse are facing,” Kester Mann, principal analyst at researcher CCS Insight, said by e-mail. “U.K. operators are cutting their dependence on distributors in the face of falling revenue.”

Dixons fell 5.23 pence to 45.67 pence at the close in London, valuing the Hemel Hempstead, England-based company at 1.7 billion pounds. That’s about the same valuation as Carphone Warehouse, whose stock slid 26.5 pence to 301.3 pence.

The merger faces a “small chance” of being referred to U.K. competition regulators because of the companies’ strength in some product areas and their dominance in service provision, said Freddie George, an analyst at Cantor Fitzgerald in London.

The proposed combination will provide increased scale that the companies say will drive 80 million pounds of annual savings by 2018 and put them in a stronger position to fend off online competition.

Bolstering Defenses

“Technological, demographic, consumer and retail trends are all shifting in such a way that the combined entity will be superbly positioned to benefit from current and future demands of the connected consumer,” said Bryan Roberts, an analyst at researcher Kantar Retail in London. “This isn’t a land-grab, or a marriage of convenience, but a sound move based on uniting different strengths.”

The merger, which follows almost three months of negotiations, brings together companies with combined revenue of about 12 billion pounds. Investors in each company will hold 50 percent of the new entity, to be known as Dixons Carphone Plc.

The rationale behind the combination is to create a business at the heart of the home of the future, offering a full range of connected devices, according to the retailers.

“This merger is ahead of the curve, it’s about thinking about the future and how people will live their lives, because we’ve put these very powerful computers into smartphones and into people’s pockets,” Carphone Warehouse Chief Executive Officer Andrew Harrison said by phone.

Management Structure

Credit-default swaps on Dixons dropped as the planned transaction boosted perceptions of creditworthiness. The swaps declined 11.5 basis points to 135, the lowest since January 2008, according to data compiled by Bloomberg.

Dixons is the larger company in terms of sales, reporting underlying revenue of 8.2 billion pounds for the year ended April 2013, compared with 3.7 billion pounds for Carphone Warehouse in the year through March 2013.

Dixons head Sebastian James will be CEO of the merged company, with his Chief Financial Officer Humphrey Singer also continuing in that role. Carphone Warehouse Chairman Charles Dunstone will hold the same position in the new company.

The executives are “all committed to staying within the business,” said Harrison, who will be James’s deputy at the merged company.

“Seb and me as deputy CEO will run this thing together,” Harrison said. “Seb can do more of the external work and I can do a lot more of the internal developing of strategy.”

Profit Outlook

Dixons also said today that full-year pretax profit will be at the top end of analyst estimates stretching from 150 million pounds to 160 million pounds. Gross profit margins showed improvement in the second half of the year, though still narrowed by 0.2 percentage point, the company said.

Carphone Warehouse, started in 1989 by Dunstone and his business partner David Ross, is Europe’s largest independent telecommunications retailer, according to its website. The London-based company has more than 2,000 stores and also owns a 46 percent stake in Virgin Mobile France.

Dixons has about 950 outlets, including the Currys chain in the U.K. that sells everything from washing machines to televisions. It also owns PC World in the U.K., Scandinavian market leader Elkjop and Kotsovolos in Greece.

Carphone Warehouse was advised by Deutsche Bank AG and UBS AG and Dixons worked with Citigroup Inc. and Barclays Plc.

Before it's here, it's on the Bloomberg Terminal.