Logos of Dixons and Carphone Warehouse

They were the worst of enemies. Five years ago, the US’s Best Buy, in partnership with Carphone Warehouse, was plotting an assault on the UK electricals market, that many feared would decimate Dixons.

As the Carphone Best Buy venture parked its tanks on Dixons lawn, John Browett, then chief executive of Dixons, mounted a spirited defence, revamping stores and opening even bigger boxes to see off the US behemoth.

In November 2011, when Best Buy Europe announced it was closing its 11 megastores, Mr Browett cracked open the champagne at the retailer’s weekly trading meeting.

This time, it is Carphone and Dixons that are courting each other. The two sides were already thought to be pretty friendly. Sebastian James, the former member of the Bullingdon Club who now runs Dixons gets on well with Carphone founder Sir Charles Dunstone and chief executive Andrew Harrison. But with a possible merger, they could bet on getting even closer.

“The management teams get on,” says one person familiar with the situation. “There will not be any social issues.”

Another noted that the two companies had looked at a combination three years ago, and might have struck a deal, had it not been for Carphone’s arrangements with Best Buy.

There are compelling reasons for the former foes to unite. The first is an opportunity to take significant costs out of the business.

Savings could be made by combining head offices, back offices and distribution operations. Both companies operate in the same market, and could run off of the same information technology system. Not only would there be benefits in the UK, but also in the Nordic region, where both companies operate.

Analysts estimate that given the two groups’ scale, they could generate annual savings of £100m-£200m.

“Given the profitability for both businesses it's a huge number,” says one. “That is a very very powerful reason for doing [a deal].”

Both companies also have large store estates, although Tony Shiret, analyst at Espirito Santo, says these are largely complementary. Carphone’s 770 UK stores are primarily on high streets and in shopping centres, while Dixons’s 500 stores in the UK and Ireland are primarily in out of town retail parks.

“But there has got to be some thought about whether you need as many stores as the two have got. That would probably fall more heavily on the Carphone side,” says Mr Shiret.

The combined group could have an opportunity to increase sales. Mobile and electronics worlds are morphing into one thanks to the rise of smartphones, tablets and other internet-enabled electrical devices, such as Smart TVs.

Dixons has Phones4U concessions in its stores selling mobile phones, under a contract that is coming up for renegotiation. A tie-up with Carphone would integrate mobile more fully into Dixons’ stores.

Dixons would benefit from Carphone’s expertise in selling phones, while Carphone would be able to take advantages of the services that Dixons provides to its customers, such as the Knowhow delivery, installation and aftercare service.

“Dixons’ ebullient CEO Seb James hasn’t seemed entirely satisfied with the arrangement with Phones4U, and if you want to be involved in this market you ought to be in bed with the best-in-class operator, which is undoubtedly Carphone,” says Nick Bubb, the independent retail analyst.

With the convergence of mobile and electronics, customers will need more advice in making an informed decision.

A strong advice and service proposition would enable the combined group to take on the might of John Lewis, which has built its electricals business on just this proposition, in effect taking a John Lewis-style service to the “man on the street”.

It is understood that the talks had their genesis in an approach from Carphone to Dixons about adopting its “Connected World” service, which advises customers on mobile technology, and gets everything up and running before they leave the store. This approach could be applied not just to mobiles and tablets, but to other items, such as Smart TVs and even digital-enabled heating controls.

But after Carphone’s experience with Best Buy – would a Dixons-Carphone merger risk becoming a Best Buy mark two?

Supporters argue that the market has moved on, even compared with five years ago. There is now more demand for advice and service, given the evolution of mobile phones into smartphones and tablets, and the development of other technologies, such as Smart TVs.

Moreover, the approach that Carphone is taking this time is different. It is teaming up with a leading player, rather than barging into a new market with the aim of dominating it with a hundreds of giant stores. And crucially, this time, Carphone will have Dixons on its side, rather than attempting to sabotage its efforts from the sidelines. Indeed, Mr James was one of the executives who worked with Mr Browett to overhaul stores and repel Best Buy.

Some analysts argue that a deal with Dixons would be more akin to the deal Carphone struck with Best Buy in its home market, where it ran the space selling phones in Best Buy’s US stores. Carphone eventually agreed to sell its stake in the US joint venture, Best Buy Mobile, to its partner for £838m.

The timing of the potential merger is interesting however. Dixons enjoyed a boost from the demise of Comet in November 2012. Its current sales now compare with the period a year ago when it was propelled by the collapse of Comet and strong tablet sales. It also faces increased competition from AO.com, formerly appliances online, which is preparing to list on the stock market, in an initial public offering that could value it at £1.2bn.

The talks between Dixons and Carphone are thought to still be at an early stage, leaving many of the details still to be hammered out. And analysts note that Mr Dunstone is a canny dealmaker with a knack of delivering value for Carphone shareholders.

But to deliver the benefits of the combination to investors, the former enemies will have to stay the best of friends.

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