Dixons and Carphone Warehouse last week announced a merger deal to create Dixons Carphone, estimated to be worth £3.8 billion.
The aim is to create a new FTSE 100 high street giant with revenues of £11 billion, yet the initial response from investors resulted in around £400 million being wiped off the value of both companies.
So what are the benefits of this merger and what are the drawbacks?
Both of these businesses have been through quite radical operational restructuring in the past five years.
The rise of online giants such as Amazon has put electronics retailers under immense pressure and has forced bricks and mortar retailers out of the market.
As a result, Dixons is operating in a market where competitors such as Comet have come and gone and is arguably the last man standing on the high street in this sector.
The reality however is that neither of these retailers can do much more in the markets they currently operate in and, if both businesses were to remain on their own, there is every chance that they might not survive in the long haul.
Combining both entities makes the businesses more efficient and, despite being ultimately bigger, also more adaptable to market change and consumers’ needs.
Joining forces to form Dixons Carphone might therefore open up some exciting opportunities for the newly formed business.
Even so, the fact remains that both Dixons and Carphone Warehouse are operating in sectors where demand for bricks and mortar retailing seems to be weakening.
Dixons has a strong presence in retail parks and Carphone Warehouse operates many high street stores, and so this merger will easily capture all of these bricks and mortar opportunities.
However, the deal will still leave a massive store portfolio in a sector where others are drastically reducing their real estate to move online.
At the same time, neither retailer has an ecommerce offering anywhere near that of Amazon. So while this merger could extend the life span of the merged retailers, it is not sustainable forever.
Indeed, independent analyst Louse Cooper summed up the merger stating “two past-their-sell-by-date retailers merging does not an Amazon make”.
So even though the short-term view may look good – largely because of reduced costs and distribution synergies – the newly combined retailer will still need to work hard to tackle the challenge of too many physical stores and a weak online offering.
- Dan Coen, director, Zolfo Cooper