Fitch: Merged Dixons, CPW Could Achieve Improved Debt Ratings

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A merger of Dixons and Carphone Warehouse could create a company with the size to achieve a rating a notch or two higher than Dixons' current 'B ' rating, Fitch Ratings says.

The ratings agency said that the debt rating of a combined entity would be constrained by its relatively low operating profitability and high lease-adjusted leverage. A rating below the low 'BB' category could result from factors including how a deal was structured, the potential for integration risks and the financial policies of the combined business, particularly its approach to shareholder remuneration.

Dixons and Carphone Warehouse have said they are in preliminary discussions regarding a possible merger.

A combination of the two companies would create a business with annual sales of over GBP12bn and EBITDAR of over GBP1.2bn. It would also generate significant cost-saving opportunities from merging back-office and distribution functions and the potential to increase combined sales.

The greater profitability of mobile phones than household appliances means it would also have slightly stronger margins than Dixons does on its own. The combined EBIT margin for FY13 would have been around 2.2%, compared with 1.6% for Dixons, and synergies from the combination would lift this figure further. However, even with the benefit of significant cost savings, the EBIT margin would probably remain below 5%, low compared with other non-food retail sectors, leaving limited margin for error in the event of adverse business or economic conditions.

Although both companies have very low financial debt, they have high rent costs. Dixons' leverage, measured as lease-adjusted net debt/EBITDAR, was 4.7x at end FY13 and Fitch says that it believes a combined company would have similar leverage.

There would be an opportunity to reduce lease costs by merging stores, but this would be limited because the two companies tend to operate in different locations.

Carphone Warehouse stores are generally on high streets, while Dixons' are more often in retail parks. If there are store closures they would probably be concentrated in high streets and shopping centres because the longer leases in retail parks makes them harder to exit.

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Tags: carphone warehouse  dixons  fitch ratings  UK 

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