COLUMNISTS Carphone Warehouse seems to have caught up with the global fashion for lower leverage. The UK telecoms group has found a clever way of paying down its ballooning debt pile without raising equity or dramatically scaling down its business.
It is putting its retail business into a joint venture with the US consumer electronics group, Best Buy. The transaction raises £1.1bn which could comfortably pay off Carphone’s £840m of net debt, although much of the proceeds are to be invested into its broadband and telephone business – as well as back into the joint venture.
Shareholders should welcome the stronger balance sheet, even if this is not how Carphone is trying to sell the move. But the financial terms of the tie-up are far from compelling, and the strategic logic requires a leap of faith.
The deal values Carphone’s retail business at a 13 per cent premium to its sum of the parts on consensus estimates. That is meagre given that Carphone has ceded control by allowing Best Buy to appoint the joint venture’s top management, in spite of its US partner paying for only a 50 per cent share in the business.
Now the strategic logic. Best Buy wants to push into Europe, where Carphone has local knowledge and back-office infrastructure. Carphone wants to flog laptop computers as a means of selling broadband services, and this will require a large-store format, which Best Buy has expertise in managing. But the premise that laptops are the new mobile is questionable. Meanwhile, the expansion is targeted at an already competitive European retail market and looks high risk.
Carphone’s retail business has had a fantastic run over the past 19 years but its existing business model – selling handsets and talk plans – is dating rapidly. A clean exit from retailing at a higher premium would have been preferable.
At least Charles Dunstone, the chief executive, has recognised that the company needs to adapt. But aside from temporarily strengthening the balance sheet, it is hard to argue that the tie-up with Best Buy will guarantee Carphone’s long-term prosperity.
UK engineering
Mervyn King, the Governor of the Bank of England, last month bemoaned the gulf between City bonuses and the more humble salaries earned by employees of small and medium-sized UK companies. Few deals capture the gulf between the City and the rest of the economy quite as neatly as the latest agreed bid for Enodis, the engineering group.
The deal is an example of how the investment community seems to have given up on Britain’s engineering sector. Many UK engineers have sizeable operations in the US, which fund managers assume is a bad thing. The sector’s constituents are also relatively small and have attracted less coverage by analysts. The result is depressed valuations that make British industry a fertile hunting ground for foreign predators.
Illinois Tool Works is offering £1bn for Enodis. That is almost a 100 per cent premium to the company’s stock market value before it received an earlier bid from Manitowoc, ITW’s US rival, last month.
Mr King will doubtless regret the fact that an old-fashioned metal basher, unloved by the UK stock market, is now being sold in a deal that will fund the bonuses of City bankers whose hands are as soft as they were the day they were born. It is hard not to sympathise with him.
At least the market has belatedly woken up to Enodis’s value. Even though a counterbid by Manitowoc looks unlikely at these levels, investors have pushed Enodis’s share price above the value of ITW’s offer. That is a clear signal that shareholders want a full price for the company.
If other UK engineers such as Invensys and GKN are now also vulnerable to bids, it is not too late for investors to take a robust view on their true value.
Fat of the land
The traditional way to insure against losing an auction for a juicy asset is to buy a big stake in the target business. If you win the auction, the stake lowers your average purchase price. Lose, and you make a profit on selling it to the successful bidder.
EDF, the French energy group vying with Germany’s RWE to buy British Energy, has taken this concept and added a cunning twist. It has bought up land round British Energy’s reactors – land that whoever wins the auction for the energy group would want to develop to build more capacity. This landbank puts EDF in a position to play hard ball with RWE if it loses the auction. At the margins, that could deter RWE from bidding too aggressively for British Energy.
Alternatively, EDF could build its own reactors on the land. With the British Energy auction getting heated, that could be a cheaper way of pursuing its UK ambitions.
