Best Buy to Acquire 50% of Carphone Warehouse's European and US Retail Interests

(RTTNews) - Seeking to accelerate their growth by capitalising on the European consumers’ evolving appetite for consumer electronics, the U.S. electronics retailer Best Buy Co., Inc. (BBY | news | PowerRating | PR Charts ) and UK's largest mobile phone retailer Carphone Warehouse Group PLC (CPW.L | news | PowerRating | PR Charts ), have agreed to form a new venture company.

Thursday, Best Buy said that the assets of the newly-formed company will comprise Carphone Warehouse’s existing retail business, operating from more than 2,400 stores in nine European countries under the Carphone Warehouse and Phone House brands; and Carphone Warehouse’s share of its existing relationships with Best Buy.

However, Carphone Warehouse’s U.K. fixed line operations, its share in Virgin Mobile France and its major freehold properties will not be part of the new venture.

The relationship between Best Buy and Carphone run deep. The first move in this transatlantic relationship was made in 2006 when Carphone Warehouse partnered with Best Buy to offer its services across the U.S. through in-store concessions. As of early January, Carphone has 181 Best Buy stores with concessions and eight standalone stores. Best Buy already owns a 2.9% stake in Carphone Warehouse.

Best Buy Mobile, which Best Buy developed through its relationship with Carphone Warehouse, offers its U.S. customers twice the assortment of mobile phones previously offered in Best Buy stores. The new concept is being introduced into all of Best Buy’s stores in the United States during calendar 2008. The two companies also have been collaborating to bring Geek Squad, a 24-hour computer support task force, to European markets.

Best Buy will pay £1.1 billion or $2.1 billion in cash to acquire a 50% stake in the new company. Pending the approval of Carphone’s shareholders, the transaction is expected to close on August 30, 2008.

Carphone Warehouse plans to use the proceeds of the transaction to repay existing debt, to invest in broadband customer growth and infrastructure, and to invest in new areas of growth presented by the transaction.

Following the closure of the transaction, Carphone Warehouse and Best Buy will each own 50% of the retail business, comprising all the 2,400 stores, the web and direct businesses, the insurance operations, and its airtime reselling businesses. The Carphone Warehouse will continue to own 100% of its fixed line telecoms business in the U.K., comprising TalkTalk, AOL Broadband and Opal; and its share of the Virgin Mobile France joint venture. Best Buy will continue to hold its 2.9% stake in Carphone Warehouse.

The new joint venture will help to grow Carphone Warehouse’s existing retail business through further physical expansion in its existing European markets, build a significant market share in consumer electronics retailing in Europe, through the roll-out of Best Buy stores, beginning in calendar 2009.

Carphone Warehouse’s existing European retail management team will manage the new venture company and will be supplemented by additional personnel from Best Buy as the development of the Best Buy stores and websites progresses.

Bob Willett - CEO of Best Buy International will be chairman of the new venture, and Roger Taylor, Carphone’s CFO will be CEO of the venture, in addition to retaining his existing duties. The new company’s board will comprise equal numbers of Best Buy and Carphone Warehouse executives, including Charles Dunstone, CEO of Carphone Warehouse.

According to Carphone Warehouse, on a standalone basis, the transaction will be dilutive to its earnings per share by about 10-15% in the year to March 2009. However, the incremental opportunities for growth and value creation resulting from the transaction are expected to significantly enhance the long-term prospects for Carphone Warehouse.

For the year ended March 2007, Carphone Warehouse’s retail business generated EBITDA of £263 million ($518 million) and an operating profit of £177 million ($349 million) on revenues of £2.9 billion ($5.7 billion).

For Best Buy, the transaction is expected to add approximately $5 billion to fiscal 2009 revenue. As a result of the investment on the 50% stake in Carphone Warehouse Stores, Best Buy does not expect to repurchase shares under its existing share buyback program in fiscal 2009. Best Buy previously had revealed that its fiscal 2009 earnings guidance included an assumption of $800 million in share repurchases. In combination with the negative impact of the reduction in its share repurchases, Best Buy anticipates the transaction to be accretive by $0.05 to $0.07 to its fiscal 2009 earnings per share.

For the year ended March 2008, Best Buy reported revenues of $40 billion and operating income of $2.2 billion. Best Buy has 150,000 employees and 1,314 stores providing over 48 million square feet of sales space in the United States, Canada and China.

On the New York Stock Exchange, BBY closed Wednesday’s trade at $43.45.

On the London Stock Exchange, CPW.L is down 2.01% trading at 293.25 pence a share in Thursday’s trading.

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