Business Watch: Carphone demerger

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Carphone Warehouse employees are going to have to wait a while longer before, perhaps, the longest-running demerger saga in mobile phone history finally ends. The company has delayed the divorce of its broadband business from its retail empire until next year, disappointing its investors in the process.

It was shareholders themselves who called for the company to consider a split because Carphone carries a conglomerate–type valuation discount on the stockmarket. The recent stockmarket comeback (of sorts) had spawned hopes Carphone might be able to pull off the demerger before the year is out.

But while the company had previously indicated it was working towards a November timetable, it’s now shooting for March 2010 instead. One reason is the ritzy price of renegotiating the company’s £925 million credit facility. Roger Taylor, finance director, reckons he is close to striking new banking arrangements that should allow the demerger to go ahead early next year.

But that is also dependent on getting clearance from the UK Listing Authority and meeting the watchdog’s timetable. At the latest, Taylor says the deal should happen before July 2010 – more than one year from now.

Such a delay could cause considerable uncertainty among Carphone staff, so chief Charles Dunstone (pictured) and Taylor need to ensure they don’t lose any of their best people and damage the prospects of the business.

As for the City, Jonathan Groocock, telecoms analyst at stockbroker Investec, said the delay was a “disappointment” and told his clients to sell shares. He reckons the stock has risen of late because of expectations of the demerger.

The shares have certainly had a decent run in the last six months, rising from 90p in January to 170p this week. That is still less than half their peak price in 2007 of course, as any employee with shares will know all too well.

What happens next to the share price is anyone’s guess but at least the analysts were pleased Carphone’s full-year result came roughly in line with expectations. The company said that both the retail business – which it operates in a joint venture with US retail giant Best Buy – and the TalkTalk broadband and fixed line business had enjoyed “strong sales” between the New Year and the end of March.

The full-year figures were difficult to unpick as they were complicated by the sales of assets to Best Buy Europe and a change in the way the company accounts for subscriber acquisition costs.

At the top line, revenue fell from £1.42 billion to £1.38 billion, while underlying profit – before one-off items – rose from £4 million to £133 million. The dividend was held steady at 3p per share.

Dunstone signalled there are signs the worst may be over on the High Street, saying the UK economy had “stabilised” after the tumult of last autumn and global financial crisis. Virtually zero interest rates have no doubt helped. Nevertheless, at Best Buy margins took a hit as the price of phones kept falling.

The business is forecasting also flat like-for-like sales at best this year and not much in the way of margin improvement.

That said, in the context of a recession, 12 per cent growth in volumes in the March quarter does not look at all bad. “A lot of people thought the period after Christmas was going to be one of the weakest we’d ever seen,” said Dunstone. “That hasn’t happened – consumers have been more resilient than imagined.”

Full analysis in Mobile News issue 441 (June 15, 2009).

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