London briefing: Merger of equals could work well for retailers

Dixons in talks with Carphone Warehouse

Dixons is discussing a deal  with Carphone Warehouse that would create a new £3.5 billion force in the electrical retailing sector.

Dixons is discussing a deal with Carphone Warehouse that would create a new £3.5 billion force in the electrical retailing sector.

Wed, Feb 26, 2014, 10:54

Five years ago, Dixons could have been snapped up for less than £250 million (€303 million). By late 2008 its shares had slithered to an all-time low of just 6.75p after retailing rival Carphone Warehouse joined forces with US giant Best Buy to establish a chain of electrical megastores across Europe.

Those stores would blast Dixons out of the market, marking the demise of a business that first opened its doors as a photographic studio in Southend High Street in 1937. Or so the City believed.

Now Dixons is in talks with Carphone Warehouse for a deal that would create a new £3.5 billion force in the electrical retailing sector. Although talks are said to be at an early stage, the potential combination of the two has been welcomed by the market, which sent shares in both companies higher on the news.

Many deals are billed as “mergers of equals” although few turn out that way; one company always tends to come out on top whether because of its size or because its management has the upper hand. But a combination of Dixons and Carphone comes pretty close: before news of the talks leaked, Dixons was valued at £1.8 billion and Carphone at £1.7 billion.

The £1.8 billion valuation for Dixons is a far cry from its worth five years ago. Since then it has seen off the threat from Best Buy, which never took off in Britain and abandoned its ambitious venture with Carphone a year ago. It has revamped its stores chain, improved its reputation for service and has seen sales grow on the back of the boom in iPhone and tablet purchases.

But perhaps the biggest boost was the collapse of rival electricals chain Comet in 2012, which left about £1 billion of sales up for grabs. Dixons, which owns Currys and PC World, grabbed a significant share of that business.


Joining forces
It’s not the first time the two companies have considered joining forces. There were discussions in 2011, but they came to nothing. And this round of negotiations looks to have started initially as a more modest plan for Carphone to take concessions in Dixons stores. Dixons has a link-up with Phones4U with concessions in about 150 of its outlets, but remains under-represented in this market.

A full-scale merger with Carphone would boost Dixons presence in the mobile market, where smartphones are becoming increasingly important in accessing the web.

Combining the two groups would cut head office overheads and there would also be some overlap on stores. Together, they would have greater buying power.

In terms of management, it would appear that Dixons’ chief executive Sebastian James would take the same role in the enlarged group while Carphone co-founder Sir Charles Dunstone would become chairman. Dunstone is a key player in the merger talks as he owns a 23 per cent stake in Carphone.

Some analysts say the logic of a deal looks more compelling for Dixons than for Carphone. However, Dunstone is highly regarded as an extremely shrewd operator and clearly sees something in it for his company. Under takeover rules, the two sides now have a deadline of March 24th to thrash out terms. Full details of the “merger of equals” are eagerly awaited in the City.


Happy bankers
When is a bonus not a bonus? When it’s a “fixed pay allowance”. That’s the device that HSBC, Britain’s biggest bank, has come up with to circumvent Europe’s new rules on capping bonuses for bankers.

In a ploy that’s likely to be copied by other banks, HSBC is awarding these new allowances to hundreds of its bankers, including chief executive Stuart Gulliver, who will receive £1.7 million. That takes his total pay packagefor last year to £8 million, up from £6.3 million.

As the allowance is not based on performance, it is not regarded as a bonus. It therefore allows the bank to pay its top people more while staying within the new rules that bonuses be no more than 100 per cent of salary, or 200 per cent with shareholder approval.

For Gulliver, the allowance bumps up the fixed proportion of his pay from £2.5 million to £4.2 million.

The bank will have to pay this even if it has a dire year and, as it is not a bonus, it cannot be clawed back if things go belly-up in the future.

There was precious little clawing back of bonuses in the banking sector following the financial crisis, but at least it was an option.

Now even that sanction is fading.

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