It is rare for “mergers of equals” to work straightaway, so is it surprising that the Dixons Carphone merger has attracted some cynicism?

It is rare for “mergers of equals” to work straightaway, so is it surprising that the Dixons Carphone merger has attracted some cynicism?

The Dixons fourth quarter trading update today was, as expected, accompanied by confirmation of the much-mooted merger with Carphone Warehouse. A lot of the detail had been widely leaked, but one surprise was that, in their “merger of equals”, the new company name is going to be Dixons Carphone and not Carphone Dixons!

It was, perhaps, not a surprise that the two companies chose to present their new vision of “a connected world” from the uber-trendy surroundings of the 34thfloor presentation room in the new Shangri-La hotel in The Shard, rather than in some dingy basement in a City investment bank. What better perspective from which to survey the sunlit uplands of the bright new connected future promised by the enthusiastic management team?

Carphone Warehouse founder Charles Dunstone made clear that the world is changing rapidly as new devices emerge to take advantage of the connectivity delivered by super-fast broadband. Therefore, a merger of the leading electricals retailer in Europe and the leading telecoms retailer in Europe ought to deliver some value, as their markets converge. And as Seb James of Dixons said, both companies have a common vision of selling the technology and services that make up “The Internet of Things”, which will help improve customer’s lives and homes.     

So what could possibly go wrong and why have the share prices of the two companies fallen back today?

Well, for a start, it’s only six years ago that Charles Dunstone was telling everybody how wonderful Best Buy was, after announcing a 50/50 merger, so some cynicism about his latest brainchild is only to be expected, even if the explosion of online shopping and data usage is changing the market so quickly.

And the problem with a merger like this is that nobody seems to have really lost out at the top. In fact, the boast is that given all the jobs that will be created in the roll-out of Carphone Warehouse shop-in-shops inside Dixons’ stores, the merger will actually create 2% more jobs overall, despite the inevitable rationalisation of head office and back-office functions.

And talking of rationalisation…the City was also a little underwhelmed by the news that the synergies to be created from the merger will “only” amount to £80m, despite some £55m to £60m of exceptional costs.

But, to be fair, the £80m of synergies is a very conservative estimate, amounting to little more than the benefit of the substitution of Carphone Warehouse for Phones4U shops inside Currys and PC World and the further roll-out of Carphone within Dixons (both in the UK and in Sweden), plus buying economies and head office savings.

The synergies should be much bigger than that, as it’s hard to believe that there won’t be some rental savings from the inevitable reshuffling of the Carphone Warehouse store portfolio. There will also be big benefits in due course to the new group’s combined tax charge and interest charge from the merger, taking advantage of Carphone’s better terms.      

The combination of Carphone’s expertise in service and advice with Dixons’ store platform and “knowhow” should also deliver great growth in customer and B2B services.

And yet it’s hard to avoid the view that there are some defensive aspects to the merger in a world where the big suppliers,software companies and networks are getting more powerful. Seb James himself mentioned the famous Athena poster of the sea pounding a lighthouse and said that Dixons Carphone will be the lighthouse that will survive whatever the cruel world can throw at it.

And though the merger is said to be being done from a position of strength on both sides, the news today that Dixons UK like-for-likes were down 2% in its fourth quarter was a little disappointing, notwithstanding the strong comparatives and better gross margins.

But all this is the stuff of short-term reactions and share prices often find it easier to travel than to arrive, after a good run. The new management team do seem to genuinely get on well together and talk the same story, so it’s up to them to get on and convince the cynics that in the long-term this exciting merger will really create a new powerhouse in the marketplace.

 

About Nick Bubb

Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos “Retail Think-Tank”.