Remember those sunny days of 2014 when the managements of Dixons and Carphone Warehouse unveiled their “genuine” merger of equals? The fit was perfect, the executives agreed, and Carphone’s mobiles would soon be communicating with Dixons’ fridges. The 50:50 merger terms were declared to be fair to both sets of shareholders.
But they weren’t. Half a decade later, Dixons makes the money and Carphone is barely profitable. Now the latter is disgorging an ugly mess in the form of a £29.1m fine from the Financial Conduct Authority (FCA) for mis-selling Geek Squad, an insurance and technical support policy. The geeks, it turns out, were encouraging customers to buy a policy many didn’t need; home insurance or bank accounts provided the same cover.
In the grand scheme of things, a £29m financial wound plus £2.3m in compensation for 28,000 customers doesn’t hurt terribly, but damage to reputation is always harder to measure. For Carphone, a business built on the idea it is the punter’s friend in the baffling world of mobile phone contracts, it looks terrible.
Carphone is a “very different business today”, says the group chief executive, Alex Baldock. There’s no reason to doubt him: the FCA investigation covered the 2008-15 period, so mostly before the merger. But shareholders in the former standalone Dixons may wonder why their bosses were seemingly blind to the risk. After all, Carphone’s Geek Squad product is a close cousin of extended warranties, which caused a lot of bother for Dixons in the old days.
Those same Dixons investors now know they had two good years from Carphone, but that was all. Since 2016, the phone business has struggled against a downturn in handset sales and punishing contracts with the mobile networks. Baldock is renegotiating the contracts and may even succeed eventually in reinventing Carphone’s business model, but the setbacks are reflected in a halved share price since the merger.
The only obvious winner has been the Carphone founder, Sir Charles Dunstone. He made an excellent damage-limitation trade when he swapped his Carphone stake for shares in the merged entity at 2014 valuations. Intentionally or not, he got close to catching peak Carphone.
Staberdeen’s double act ends
The Keith Skeoch-Martin Gilbert double act at the top of Standard Life Aberdeen got a pasting from the critics and now the show is over. Well, sort of. The easy part to understand is that Skeoch will become sole boss, thereby ending the unconventional co-chief executive lark. But does Gilbert’s new gig as vice-chairman of the merged Scottish asset manager require him to do much more than order new business cards?
In reincarnated form, Gilbert will focus on “strategic relationships with key clients, winning new business and realising the potential from our global network and product capabilities”, according to the blurb. But he was doing all that already. The major change seems to a lightening of his load on the regulatory front. That will free up time to charm clients, but since Gilbert will still be reporting to the new chairman, Sir Douglas Flint, scope for governance confusion would still seem to exist.
Still, there’s no doubt the group needs all the new business Gilbert can collect. About £116bn of funds were redeemed last year vs the arrival of £75bn of new money. That net outflow of £41bn was even heavier than in 2017. These are tough times for mainstream asset managers – investors grew nervous at the end of last year and there’s been a drift to private investments – but the creation of Staberdeen was meant to counter such forces.
“Adjusted” pre-tax profits from continuing operations fell only marginally, to £650m, but the shares are down almost 40% since the 2017 merger, and the return of £1.3bn to shareholders makes the statistic only slightly less painful. This, remember, was a £11bn beast on day one.
The better news for investors was an intention to hold the dividend “during the period of transformation”, which presumably means until the end of 2020. A dividend yield of 8.6% says shareholders remain nervous about 2021.
Debenhams’ loan dilemma
Mike Ashley never gives up. The Sports Direct tycoon has offered to lend Debenhams £150m on terms that, superficially, would be better than those the department store group is negotiating with its current lenders.
What’s the catch? Well, the loan would only be interest free if Sports Direct can buy another 5% of Debs. If not, a 3% rate would apply. But that figure would still beat the banks’ offer. Rather, the real demand is that Ashley becomes chief executive.
The Debs board, one assumes, will say no to avoid giving Ashley control via the backdoor. But the justification needs to be legally watertight.
