Carphone and Dixons seal the deal

Carphone Warehouse and Dixons Retail are to merge, the two companies announced on Thursday.

The deal, an all-share merger of equals in which each company's existing shareholders will hold 50% of the new business, follows three months of negotiations between Carphone chairman Sir Charles Dunstone and Sebastian James, the chief executive of Dixons.

Dixons Carphone, as the new company will be known, will bring together two businesses that are currently worth around £1.8 billion each and which have combined annual sales of £12 billion. The companies said they expected the deal to produce £80 million worth of savings a year by 2018.

However, the main driver for the merger is strategic rather than cost-conscious. It represents a bet on the "internet of things", the technology theme that is currently exciting consumer businesses more than any other.

Both businesses see the connected home - where appliances such as heating boilers, washing machines, freezers and cookers are connected to the internet and can be managed remotely by homeowners via smartphones, tablets and other devices - as representing a huge opportunity.

They argue that a single company, combining Britain's leading seller of telecoms products and its biggest consumer electricals retailer, will be well-placed to capitalise.

"The ability to take what we have built in electrical retailing and add the profound expertise of Carphone Warehouse in connectivity would make us a leading force in retailing for a connected world," said James. "Together we can create a seamless experience for our customers that will enable technology to deliver what it promises - that is, to make their lives better."

Sir Charles added: "We see the merger of these two great companies as an opportunity to bring our skills together for the consumer and create a new retailer for the digital age."

Under the terms agreed, Dixons boss James is to be the chief executive of the new business, while Carphone chief executive Andrew Harrison will serve as his deputy. Sir Charles is to chair the company, while Dixons' chief financial officer Humphrey Singer will take the same role at the larger business.

Separately, Dixons said on Thursday that its trading over the past 12 months has been strong, with full-year like-for-like sales up by 3%.

The company, which has more than 500 Currys and PC World stores in the UK and Ireland, as well as operations in Scandinavia and Greece, said profits would come in at the top end of the market's expectations of between £150 million and £160 million.

Carphone Warehouse has also performed strongly over the past year, expanding its market share and posting strong sales growth. The business has around 2,000 outlets across Europe and also owns a 46% stake in Virgin Mobile France.

Will the deal work?

There's no arguing with the strategic rationale for the merger of Carphone and Dixons. The internet of things is set to be a major consumer theme over the next five to 10 years, and a retailer offering integrated products and services geared towards the idea of the connected home should find itself in a sweet spot.

Moreover, the scale the combined company will have will help it better compete with online rivals, now the main source of competition in these sectors.

For all that, however, the main challenge lies in execution. It is significant that shares in both companies fell today - Carphone was off almost 2% by mid-morning, while Dixons was down by more than 3% - reflecting market fears about the two companies' ability to make the merger work in practice.

Carphone, in particular, has form here, having seen its joint UK venture with the US electricals giant Best Buy fail a couple of years ago, despite its seemingly compelling strategic drivers. Ironically, one reason for the failure was a strong competitive performance from Dixons.

David Alexander, a retail analyst at Conlumino, warned: "Although there are plenty of reasons to view the merger in a positive light, the history of mergers and acquisitions is littered with the corpses of failed unions."

One major issue for the new company will be rationalisation of the retail footprint, with both companies currently well-represented in both town centre sites and out-of-town shopping centres. Dixons Carphone may simply have too many stores, despite the companies' insistence that closures should not be necessary.

Another issue will be the ability of what will remain a conventional physical retail business to capitalise on a trend potentially better suited to online rivals. Analyst Louise Cooper warned: "Two past-their-sell-by-date retailers merging does not an Amazon make."

Still, if the new company is able to overcome such difficulties, there is clear market potential and some analysts were inclined to be more positive on Thursday.

"Technological, demographic, consumer and retail trends are all shifting in such a way that the combined entity will be superbly positioned to benefit from current and future demands of the connected consumer," said Bryan Roberts of industry specialist Kantar Retail.

"This isn't a land-grab, or a marriage of convenience, but a sound move based on uniting different strengths."