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Best Buy, Carphone reconfigure alliance

by Laura Board | Published November 8, 2011 at 9:46 AM

Best Buy Co. and Carphone Warehouse Group plc on Monday dramatically curtailed alliances in North America and Western Europe but pledged cooperation in emerging markets including China and Mexico.

Best Buy said it will pay Carphone Warehouse about $1.3 billion to buy out the U.K. company's stake in a 5-year-old profit-share agreement covering the successful Best Buy Mobile venture in the U.S. and Canada, as Minneapolis-based Best Buy counts on cellphones to offset declining sales of many traditional electronics products.

In the U.K. the two companies will close 11 pilot warehouse-style electronics stores opened under a 2008 joint venture and concentrate on their 2,500 small outlets in Western Europe. The companies had originally hoped to open 200 large outlets in Europe by 2013, and the closure of the money-losing test stores reflects a harsh retail environment, where even established electronics retailers are struggling.

The companies also announced a new profit-sharing agreement governing Best Buy Mobile outside North America and Western Europe. Full details of which markets they will target will come later, but Best Buy's existing operations in China and Mexico will form part of the alliance.

"Each of these actions represents an exciting growth opportunity for Best Buy and near- and long-term value for our shareholders. We are aggressively ramping up our growing connections capability to support consumers' increasingly connected lives across the entire range of devices entering the marketplace," Best Buy CEO Brian Dunn said in a statement.

Best Buy said the Best Buy Mobile buyout in the U.S. and Canada and the U.K. store closures will boost earnings per share by 35 cents to 40 cents in 2013.

Those actions and a $1.2 billion write-down on Best Buy Europe goodwill will lead to a one-off charge of $2.6 billion for Best Buy in fiscal 2012.

Best Buy bought half of Carphone's retail operations for about £1.1 billion ($2.1 billion) in 2008 to expand in Europe, where Carphone ranks as the largest independent cellphone retailer.

The companies Monday established a framework enabling them to part company in Europe, granting each other a call option to acquire their respective 50% stakes in Best Buy Europe from March 2015.

Best Buy has first dibs under the deal, and if it chooses not to exercise an option to buy the outstanding 50% at fair market value, Carphone will be able to purchase Best Buy's stake at a 10% discount to fair market value.

If neither party exercises its call option, both options will roll forward every three years.

Outside of Europe and North America, the companies said their new "global connect" venture for mobile devices including cellphones and laptops will be a "capital-light" model that will include partnerships with major retailers in target markets.

Best Buy shares rose 3 cents to $27.31 early Monday, giving the company a market value of $9.9 billion.

Carphone Warehouse expects to return up to £813 million from proceeds of the Best Buy Mobile stake sale to its shareholders, a payout that helped push its shares up 4 pence to 349 pence by early afternoon despite a slump in first-half same-store sales and earnings.

London-based Carphone, 29% owned by founder Charles Dunstone, has a market value of just under £1.6 billion. Last year it demerged from its TalkTalk Telecom Group plc division.

Separately on Monday, Best Buy agreed to acquire VC-backed, Waltham, Mass.-based cloud-services provider Mindshift Technologies Inc. for $167 million as the retailer looks to bolster its business in IT services.

Credit Suisse Group is Carphone Warehouse's adviser and broker.

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