Best Buy to Acquire Carphone’s U.S. Mobile-Phone Stake for $1.34 Billion

By Chris Burritt and Peter Woodifield - Nov 8, 2011 4:26 AM GMT+0700

Best Buy Co., the world’s largest consumer-electronics retailer, agreed to buy Carphone Warehouse Group Plc (CPW)’s stake in their U.S. mobile-phone joint venture for 838 million pounds ($1.34 billion) and close the U.K. stores it opened less than two years ago.

The purchase of Carphone Warehouse’s interest in a profit- sharing agreement for the Best Buy Mobile business in the U.S. and Canada will boost earnings next year, excluding items, the Richfield, Minnesota-based retailer said today in a statement. Carphone Warehouse will return almost all of the proceeds to shareholders, according to a separate statement.

Best Buy Chief Executive Officer Brian Dunn is betting on mobile phones in the U.S., where slumping television sales and competition from Amazon.com Inc. (AMZN) have led to five straight quarterly declines at stores open at least 14 months. The 11 “big box” stores that are being closed in the U.K. have been pinched by a decline in consumer spending.

“The investment community has wanted to see Best Buy take full control of the U.S. mobile business where there’s still strength at least for the near term,” Joe Feldman, an analyst at Telsey Advisory Group in New York, said in a telephone interview yesterday. “Closing the U.K. stores signals the highly competitive market and the tough economic environment.”

Best Buy fell 3.1 percent to $26.46 at 4:15 p.m. in New York. Carphone Warehouse advanced 0.9 percent to 348 pence in London trading.

Mindshift Acquisition

Best Buy will incur expenses of about $2.6 billion, including $1.2 billion to write down Best Buy Europe’s goodwill. Excluding restructuring charges and other items, the deal will boost profit by about 5 cents a share in the fourth quarter of fiscal 2012.

Separately today, Best Buy agreed to buy mindSHIFT Technologies Inc., a provider of information technology services to small and medium-sized businesses, for $167 million, according to a statement.

The acquisition reflects Dunn’s push into services as sales at Best Buy’s traditional stores has slowed because of competition from Web retailers and Wal-Mart Stores Inc.

While trying to match the discounters on price, Best Buy aims to boost profit by selling services and add-ons Wal-Mart, the world’s biggest retailer, and Amazon don’t offer. Those include extended warranties, digital content streamed to devices and remote home-monitoring and repair, Mike Vitelli, co-chief of the North American division, said in an interview earlier in this year.

Reorganizing Stores

“Smartphones are just the beginning” as Best Buy accelerates efforts to sell services for tablet and notebook computers and televisions, Dunn said today in a telephone interview.

Best Buy is also reorganizing stores, starting last year with tests in Pittsburgh and Las Vegas offering a glimpse of the retailer’s new direction that Dunn calls the “connected store.” Stores display a range of gadgets -- from tablets to cameras to digital photo frames -- on low tables and employees are trained to demonstrate how they can be connected.

Best Buy sold more repair services and warranties in the second quarter ended Aug. 27, spurring a sales gain of 3.2 percent in services by stores open at least 14 months, according to a quarterly securities filing.

Best Buy Mobile was formed with the intention of establishing outlets in the U.S. and Canada offering customers a variety of network options. The unit has dedicated areas inside all Best Buy’s 1,106 U.S. large-format outlets, and 247 smaller standalone stores. The venture’s 5 percent market share compares with 1 percent when it started, Carphone Warehouse said in June.

Cash Return

“Realizing cash in the current environment is pretty attractive,” Carphone CEO Roger Taylor said in an interview. “The venture has raised over a billion of cash in four-and-a- half years and our shareholders haven’t had to put a penny in.”

As much as 813 million pounds of the proceeds will be returned to shareholders through the issue to investors of Class B shares. That gives investors the choice whether to take the money as income or capital, Taylor said.

The decision to close the British stores was taken amid increasing losses. The Best Buy U.K. unit posted a first-half loss of 46.7 million pounds, up from 28.8 million pounds a year earlier, the London-based company said today in a statement.

Virtually all the 1,000 employees affected will be given the opportunity to redeploy elsewhere in the group, Taylor said.

Call Option

Best Buy opened its first U.K. “big box” store in 2010 after it pushed back initial plans to open in 2008 and said at the time that Europe is a “highly attractive market” for consumer-electronics retailing.

The retailer set out to distinguish itself with an emphasis on service and larger format 30,000-square-foot stores. Its online platform was criticized by analysts for starting up after it opened its stores and the unit never made a profit.

The sale agreement also gives both companies a call option to buy each other out of their Best Buy Europe venture in March 2015, with Best Buy having the right to exercise the option ahead of Carphone Warehouse.

The two companies also formed a Global Connect venture that will operate outside Europe and North America, including laptops, tablets and mobile phones, in line with Carphone Warehouse’s strategy in Europe.

If Best Buy decides to exercise its call option on their European venture, Carphone Warehouse has the option to sell its share of Global Connect to Best Buy after a further three years, Taylor said.

Carphone Warehouse said its profit in the six months ended Sept. 30 slumped 80 percent to 4.6 million pounds, or 1 penny a share, from 23.4 million pounds, or 5 pence, a year earlier. The company reaffirmed its forecast for full-year profit.

(Best Buy held a conference call for analysts today. Click www.investors.bestbuy.com for a replay.)

To contact the reporters on this story: Chris Burritt in Greensboro at cburritt@bloomberg.net; Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net.

To contact the editors responsible for this story: Paul Jarvis at pjarvis@bloomberg.net; Robin Ajello at rajello@bloomberg.net