IoT drives merger of UK retailers May 15 2014

Carphone Warehouse and Dixons announce £3.8bn merger to save costs and take an early position in connected devices

By Caroline Gabriel 

There is plenty of discussion about how the internet of things will transform the mobile ecosystem, forcing existing suppliers and operators to adapt to a world where everything, not just the handset, may be connected to the internet or a mesh of gadgets. Their challenge will be to adjust their business models so that the IoT does not usher in a whole new breed of success stories. The same pattern will also be seen among electronics retailers, and two UK-based majors have announced a £3.8bn merger, betting on providing a one-stop shop for every connected product.

Carphone Warehouse and Dixons are two of the few survivors of the bloodbath among European bricks-and-mortar electronics retailers, and have already been through multiple rounds of alliances and M&A as they have tried to fend off online-only rivals like Amazon. Those deals included an ill-fated joint venture between Carphone and US-based Best Buy, though the UK company's chairman, Charles Dunstone, was much praised for his good sense of timing when he virtually exited the partnership in 2011, just as the US was starting to feel the pinch of smartphone saturation.

Shareholders will be hoping that Dunstone's timing remains sound in 2014, as he takes a gamble that this is the right time to refocus the business around all kinds of connected devices, creating a single brand to address the IoT. There is a certain consistency with his approach when he turned his back on the Best Buy UK 'big box' stores. At the time he said. "The technology world has changed substantially since 2008 and we are confident we will best serve our customers by investing in a single brand and format rather than two." The technology world continues to change rapidly and Dunstone and his counterpart at Dixons, CEO Sebastion James, believe that pooling their resources in a common brand is still the way forward.

Of course, the main motivation will be cost-cutting, as physical retailers struggle to compete with online-only firms, especially at the lower end of the device market, in which many IoT devices will slot. The all-share merger, which has been discussed since February, will give each company a 50% stake in the new Dixons Carphone entity, which will look for at least £80m a year in savings, half of this to be achieved by fiscal 2015/2016 and the rest by 2018. Dunstone - who founded Carphone in 1989 - remains as chairman of the combined group and is expected to own about 12%. James will be CEO and Carphone's current CEO, Andrew Harrison, becomes deputy CEO.

The group will have a combined network of 3,000 stores across Europe and a turnover of almost £12bn.

As the smartphone becomes the remote control for a whole host of home and mobile devices, nevertheless the new firm knows this will be a gradual evolution, and it needs to see some more immediate benefits beyond just synergies. Despite some saturation, the most profitable activity for both players is selling cellphones and combining their operations here should boost the margins further. Concessions run by Carphone competitor Phones4U in Dixons' stores - branded PC World and Curry's - will be replaced, giving Carphone a further 1,200 UK outlets.

Kantar Retail analyst Bryan Roberts told UK newspaper The Guardian: "The scales have fallen from my eyes. A couple of years ago the IoT sounded like science fiction but now it is actually happening. A lot of mergers are quite tactical and about putting the thumbscrews on suppliers but this seems more strategic. They are saying we believe in the next 10 years A, Band C are going to happen and we will be well positioned to benefit."

 Last year Dixons made pre-tax profits of £94.5m on sales of £8.2bn while Carphone made £59m on a turnover of £3.7bn.