Business Watch: Carphone outlook is ugly

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It’s finally official. After months of speculation, Carphone Warehouse has admitted it is considering a possible demerger of its telecoms and broadband division from its its retail empire.

It’s little surprise that Carphone chief Charles Dunstone chose last week’s half-year results to confirm the speculation.

He has been under pressure from some major shareholders to announce such a move and, with massive pressure on the share price of late, any pro-active move to improve the price was always going to be welcomed by the City.

Telecoms analysts have considered Carphone to be a quasi-conglomerate ever since Dunstone expanded the business into telecoms and broadband provision.

A demerger of that business has looked ever more likely since Carphone sold a 50 per cent stake in the retail business to Best Buy of the US earlier this year.

Most conglomerates trade at a discount on the stock market. So the theory goes that by splitting the two divisions off into completely separate entities, value would be created for the investors – who would continue to hold shares in each business.

Spinning off the telecoms arm, which owns Talk Talk and AOL, would also allow the retail division to focus on its closely watched venture with Best Buy, which plans to roll out electrical goods megastores across Europe, starting in Britain next year.

Analysts at Investec reckon Carphone’s separate telecoms and retail businesses would have a combined valuation of 180p a share if telecoms, which the broker values at £920 million, were hived off.

That compares with 113p a share last time I looked, so plenty of potential upside there then (even if it’s a far cry from the 350p levels Carphone was trading at just a year ago).

But before the analysts get too excited, Dunstone and his long time lieutenant Roger Taylor – Carphone’s numbers man – were quick to stress they won’t decide on whether to actually push the button on until next Spring at the earliest.

That seems pretty sensible given Carphone is heading into its roughest Christmas in memory: giving the pair rather more urgent matters to attend to over the next few months.

Taylor also played down talk the telecoms business might be sold, rather than demerged.

“There’s no interest in selling the telco asset,” he told Reuters. “To the contrary, we think we’re well positioned to exploit the opportunity of the asset that we’ve invested heavily in for the last two or three years.”

Taylor said Dunstone, who is still by far Carphone’s biggest shareholder, with 33 per cent of the equity, would take executive positions at both businesses if a demerger proceeds.

Just what the other shareholders would make of that remains to be seen. I suspect it could raise eyebrows if Dunstone couldn’t satisfy fellow investors that he could avoid, or sensibly manage, any conflicts of interest.

Of course if a bidder came forth with a bumper bid for the telecoms assets Dunstone might feel more tempted to make way, but the rumoured suitors – Vodafone and BSkyB – have both indicated that its not on their agenda at the moment.

As I reported last time, Vodafone’s new chief executive Vittorio Colao is busy taking the axe to costs, so an expensive acquisition of a fixed line asset is hardly going to be top of his agenda right now.

I would never rule out an audacious bid by Sky at some point though.

The Murdoch clan are deal-makers par excellence: this is the family that bought a stake in ITV (arguably) just to scupper Virgin Media’s planned bid for the broadcaster.

If they spied an opportunity, and didn’t think Dunstone’s 33 per cent holding was too much of a barrier, they wouldn’t waste time.

Meanwhile, Dunstone’s talk of possible demergers could do little to disguise the gloom surrounding Carphone’s interim figures.

On the day of the results, the shares leapt as much as 35 per cent in early trading but then dropped as much as 27 per cent to a five-year low before closing nine per cent lower at 118p.

These are remarkable share movements, which betray the historic times we are living through. Stock markets are petrified of bad news right now and Dunstone had plenty of it for the analysts when he met them after the market opened on results day.

The economic outlook across Europe was, he said, the toughest he had ever seen, with the next 12 months set to be the most challenging Carphone has ever had to deal with.

To read the full column, see Mobile News issue 428

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