LONDON Britain's Carphone Warehouse CPW.L and Dixons Retail DXNS.L have agreed a 3.8 billion pound ($6.4 billion) merger to make the most of an increasing convergence of smartphones and consumer electronics in people's lives.
Combining Carphone, Europe's biggest independent mobile phone retailer, and Dixons, Europe's No. 2 electricals retailer, would create a group with turnover of about 12 billion pounds, 2,900 stores and 45,000 staff, the companies said on Thursday.
"This is a merger that is ahead of the curve, not behind the curve, and is thinking about how the world is changing for customers," Carphone Chief Executive Andrew Harrison told reporters.
More consumers are connecting their smartphones to household devices such as music players and televisions or home appliances like ovens, heating systems and even washing machines.
The combined group will be able to provide the technology products, as well as the content and connections they need, and services such as installation, insurance and trouble-shooting.
The all-share merger will address Dixons' lack of exposure to lucrative mobile and smartphone retailing. Carphone faces growing pressure from mobile phone networks choosing direct channels to consumers.
"Right now there are four devices per UK household which are connected. In the next two years that will become 20, and in the next five years, globally, 75 billion connected devices will be sold," said Dixons Chief Executive Sebastian James.
Carphone and Dixons announced merger talks in February but Harrison said he and James had discussed the prospect for four years. "We could probably write the strategies of the business over each other and they would match," Harrison said.
The structure they came up with is an equal split of ownership in the new company, named Dixons Carphone, between existing Dixons and Carphone shareholders.
Dixons shareholders would receive 0.155 of a new Dixons Carphone Plc share in exchange for each Dixons share. Based on Wednesday's closing prices, Carphone had a market value of 1.90 billion pounds and Dixons 1.87 billion pounds, and the combined group is likely to enter Britain's FTSE 100 index.
Shares in Dixons were down 6.4 percent, while Carphone's were down 4.4 percent at 1252 GMT. Shares in both companies have gained since they announced the tie-up talks.
Cantor Fitzgerald analyst Freddie George said the merger looked more compelling for Dixons.
"It is unlikely to be interested in Carphone's European operations, which include Virgin Mobile in France," he said.
COMPANIES UPBEAT ON ANTI-TRUST CLEARANCE
The two firms said they would be able to achieve synergies and cost savings of at least 80 million pounds on a recurring basis, expected to be delivered in full in the 2017-18 year, including measures such as rationalising of infrastructure.
While some staff roles would no longer be needed, the two firms said the merger would lead to an overall increase in jobs.
They plan to install Carphone "shop-in-shops" inside Dixons' Curry's stores, as well as some in Nordic countries, though there has been no decision yet on whether to close some Carphone
Charles Dunstone, Carphone's co-founder, chairman and 23.5 percent shareholder, will chair the combined group.
Dixons, home to the Currys and PC World chains in Britain, Elkjop in Nordic countries and Kotsovolos in Greece, will take the top two executive jobs, with CEO James and Chief Financial Officer Humphrey Singer adopting the same roles.
Harrison will become deputy CEO, while Roger Taylor, deputy chairman of Carphone, and John Allan, the Dixons Retail chairman, will be deputy chairmen.
The proposed merger requires the approval of Dixons and Carphone shareholders as well as anti-trust clearance, which James said they expected to get.
Cantor Fitzgerald analyst George said there was a small chance the merger could be referred to the UK's Monopolies Commission, because of an overlap in product segments and the service dominance of the two businesses.
Deutsche Bank and UBS are advising Carphone Warehouse on the deal while Citigroup and Barclays are advising Dixons Retail.
Strong demand for smartphones and tablets in Britain has driven Carphone's 33 percent share price rise over the last year, offsetting weakness in its French business, and the firm has high hopes for 4G superfast mobile broadband products.
Shares in Dixons, which trails Germany's Media-Saturn in Europe by annual sales (MEOG.DE), have risen 38 percent in a year. The company has focused increasingly on markets where it has a leading "multi-channel" position with a combined stores and internet business, and recently offloaded its loss-making e-commerce unit PIXmania and operations in Turkey and Italy.
Dixons also released a trading statement on Thursday, forecasting that its full-year underlying profit before tax would be at the top end of market expectations of 150 million pounds to 160 million pounds.
($1 = 0.5960 British Pounds)