Phones 4U, the British phone retailer which is controlled by BC Partners, the private equity group, stands to lose a major part of its sales after UK mobile phone operator Vodafone revealed it would withdraw its products from the chain early next year.
The value of debt in Phones 4U listed on the Irish stock exchange fell by close to two-thirds on Monday after the announcement.
The decision will leave the retailer with only EE as a full mobile network operator partner, although the future of that contract is also in question given an ongoing review at the telecoms group.
Virgin Mobile, a mobile virtual network operator (MVNO), which means it does not own its own infrastructure, is still available through Phones 4U alongside other similar retail brands. Phones 4U also has its own mobile service called Life Mobile.
Vodafone comprised more than a quarter of contract connections made by the retailer in the 12 months to July, and about one-seventh of connections made without a long-term contract. This generated turnover of about £212 million for Phones 4U, or about £18.5 million in earnings before interest, tax, depreciation and amortisation.
Vodafone will join Three and O2 in withdrawing handsets from the stores, reflecting a wider strategic shift among operators about how they use third party retailers that compete with their own chains of shops.
Vodafone has been reviewing its retail channels in the UK after committing to build a further 150 of its own stores, increasing the total number of its branded outlets to more than 500. “As part of that review, Vodafone today confirms that it will be enhancing its distribution partnership with Dixons Carphone from early next year and will not be extending its existing contract with Phones 4U, which expires in February 2015,” the company said.
In an update to investors in the company’s debt, the retailer said it was “both surprised and disappointed” with the Vodafone decision. It added that it was “in discussion with other” mobile network operators to take Vodafone’s place.
“Through these and other discussions, the directors believe that it may be possible to replace the volume of connections it procured for Vodafone with connections for the existing networks offered by P4U (EE, Orange, T-Mobile and Virgin Mobile), other network operators, third party MVNOs and its own MVNO (Life Mobile).”
BC Partners has already recouped 1.3 times its initial investment by paying itself a dividend last year. The group wrote down the value of its residual investment in the retailer by 83 per cent earlier this year to €7.7 million after Carphone Warehouse agreed to merge with electricals chain Dixons. The merger strengthened Phone 4U’s main rival but also spelt the end of a concession agreement for Phones 4U to sell through Dixons, Currys and PC World outlets.
The debt was issued to cover the dividend payment to BC Partners, which acquired Phones 4U in 2011 for about £600 million. So-called Payment-In-Kind bonds, a type of borrowing which allows the company to roll over interest payments into the debt, was used for the recapitalisation.
Phones 4U was founded by entrepreneur John Caudwell, who sold the group to buyout houses Providence and Doughty Hanson for £1.5 billion in 2006.
David Kassler, chief executive of the retailer, said: “Although we are disappointed with the decision by Vodafone, Phones 4U continues to trade well in the market. We have high levels of market share, especially in the youth segment, and our own network Life Mobile (which was launched in 2013) is now fully road-tested and enjoying a great first year with customer growth ahead of our expectations.”
– Copyright The Financial Times Limited 2014
