Best Buy enters Europe with Carphone retail deal

By Kate Holton

LONDON (Reuters) - Best Buy, the world's biggest electronics retailer, is to pay $2.1 billion for half of Britain's Carphone Warehouse chain to take on the European consumer electricals market.

The deal creates a joint venture business that will compete with DSG International, formerly called Dixons, and Kesa which owns the French group Darty.

Carphone and Best Buy estimate the size of the European market for consumer electronics to be around 89 billion pounds ($174 billion).

The pair said the 50-50 owned company would target a growing appetite for consumer electronics, but analysts said the pair are entering a tough market where the incumbents are struggling.

Europe's biggest independent mobile phone retailer Carphone's existing 2,400 stores will continue to operate under the Carphone Warehouse and Phone House brands in its nine European markets, and from 2009 the new company will roll out larger stores under the Best Buy name.

Analysts said Best Buy would bring its understanding of the consumer electronics market to Europe, a region it has long wanted to enter, but cautioned that it could take some time to roll out the stores and secure a strong presence.

Best Buy sells consumer electronics, home-office products and entertainment software in the United States, Canada and China. The new company will open Best Buy stores in Britain and other European countries but officials of both companies would not be drawn on numbers.

Best Buy said the venture was expected to be funded through a combination of cash on hand, existing bank lines and other borrowing. It also said it now did not expect to repurchase shares under its existing repurchase program in fiscal 2009.

Best Buy said it expected the deal to add around $5 billion to fiscal 2009 revenue. Its 2008 sales are forecast at around $43 billion

The announcement follows months of speculation about a tie-up between the two companies after Best Buy took a small stake in the British company in September last year. They also have a joint venture in the United States.

"We are joining forces with a leader in consumer electronics retailing to enter a major new market together," Carphone Finance Director Roger Taylor said in a statement.

"Best Buy's track record of value creation speaks for itself. In addition, the proceeds from the transaction give us the power and flexibility to maximize the value of our fixed line business and enhance its scale and profitability."

Best Buy ranks as the world's largest listed consumer electronics retailer by market value, according to index data compiled by Reuters.

The deal will be dilutive to its earnings per share by approximately 10 to 15 percent in the year to March 2009.

"In combination with the negative impact of the reduction in its share repurchases, the transaction is expected to be accretive by $0.05 to $0.07 to its fiscal 2009 diluted earnings per share," the group said.

Carphone will use the proceeds of the sale to pay down debt, and for investment in its other businesses -- broadband and fixed-line telecoms. Carphone has already said it will consider making a bid for Italian broadband operator Tiscali.

Shares in Carphone Warehouse were down 2 percent at 0940 GMT on Thursday after they rose over 6 percent on Wednesday on bid speculation.

REDUCE DOWNSIDE RISK

British-based analysts said broadening Carphone's product portfolio beyond mobile phones to other electrical goods arguably reduced risk, although they noted that consumer electronics was a tough market.

"We believe this is a positive move," Landsbanki analyst Dan Gardiner said in a note to clients about Carphone. "We saw the distribution business as facing significant challenges and the value, once working capital outflow is factored in at significantly below this current price.

"Whilst this does not eliminate these problems and we believe that the move into consumer electronics is unlikely to offer the same returns as the existing handset distribution business this does effectively reduce the downside valuation risk."

The sale is subject to approval by Carphone shareholders.

Bob Willett, the chief executive of Best Buy International and Chief Information officer, is expected to be chairman of the new venture, and Taylor will become chief executive in addition to retaining his existing duties.

The business will be overseen by a board comprising equal numbers of Best Buy and Carphone executives, including Charles Dunstone, Group CEO.

(Reporting by Kate Holton; Editing by Stephen Weeks)

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