Best Buy buys out U.S. mobile partner for $1.3 billion

U.S. electronics retailer Best Buy Co Inc is buying its British partner out of a fast-growing U.S. mobile phone joint venture for $1.3 billion and scrapping plans for a chain of European megastores, it said on Monday.The moves are the latest sign Best Buy is scaling back its overseas ambitions to focus on its main U.S. business, which faces stiff competition from discounters and online retailers. Earlier this year, the U.S. group dropped plans for Best Buy-branded stores in China and Turkey.

The decisions also underscore the gloomy outlook for European retailers as consumers there grapple with rising prices, subdued wages growth and government austerity.

Best Buy said it would buy out Carphone Warehouse Group Plc from a profit share of their Best Buy Mobile venture in the United States and Canada, which has been benefiting from soaring demand for smartphones like Apple‘s iPhone.

“For Best Buy to be able to no longer have to share 50 percent of the profits of a high-margin, fast-growing business with Carphone Warehouse, from my perspective, is a real positive,” said BB&T Capital Markets analyst Anthony Chukumba.

“(But) it is not a game-changer. Best Buy still has the same challenges they did 24 hours ago — fairly weak product cycle particularly in flat-panel TVs, increasing competition from Amazon, probably too much retail square footage.”

The deal, along with a new venture aimed at replicating Best Buy Mobile’s success in emerging markets, helped to move attention away from the closure of the two firms’ loss-making megastores business in Britain, as well as a larger-than-expected drop in Carphone’s first-half earnings.

At 1350 GMT, Carphone shares were up 1 percent at 348.25 pence, outperforming a 1.1 percent fall in the STOXX Europe 600 European retail index.

Barclays analysts said Carphone was getting a good price, with the 838 million pound ($1.3 billion) deal worth more than the entire equity valuation of the British group when it was demerged from telecoms arm TalkTalk last year.

Carphone said it would return proceeds from the deal to investors, giving a big windfall to founder Charles Dunstone.

Dunstone, who owns about 29 percent of Carphone Warehouse according to Reuters data, has been praised by investors for striking his initial deal with Best Buy in 2008, shortly before a plunge in equity market valuations.

Best Buy said taking full control of Best Buy Mobile and closing British megastores would add 35-40 cents to fiscal 2013 earnings. The one-off cost of both actions, plus a non-cash impairment to write down goodwill, was $2.6 billion, it added.


Best Buy bought 50 percent of Carphone’s retail operations for about $2.1 billion in 2008 to tap the British firm’s expertise in mobile phones and to act as a springboard for expansion across Europe.

While the U.S. mobile phone business has exceeded expectations, the plans for a chain of European megastores have been hit by weak consumer spending, low brand recognition and competition from incumbent players such as Dixons.

Best Buy and Carphone said they would close their 11 Best Buy-branded stores in Britain at a cost of about 65-75 million pounds, but expected to redeploy most of the 1,000 or so staff.

Only three years ago, when the two firms announced plans for the megastores, they promised a chain of up to 100 outlets in Britain that would then sweep across Europe.

Best Buy, which is shrinking its U.S. megastores in the face of stiff competition and weak consumer demand, said it would focus in Europe on Carphone’s existing smaller format stores — their Best Buy Europe business.

The two also unveiled a venture aimed at replicating Best Buy Mobile’s success in emerging markets.

Carphone chief executive Roger Taylor said the firms had learnt from the mistakes of the British megastores, and would center the new venture, called Global Connect, on a smaller, fast-growing part of the electronics market and would work with local partners to tap their expertise and reduce costs.

The initial focus would be China, where Global Connect plans to introduce outlets into the 200 or so stores of Best Buy’s local partner Five Star. Standalone stores could follow, Taylor told Reuters in a telephone interview.

Global Connect was also in talks with potential partners for other markets, like Brazil, India and Indonesia, he added.

Best Buy and Carphone also formalized their relationship over Best Buy Europe, saying Best Buy would have the right to buy Carphone’s 50 percent stake from March 2015 and that, if it did not do so, Carphone would have the right to buy Best Buy’s stake at a 10 percent discount to fair market value.

Carphone reported a slightly bigger-than-expected drop in first-half earnings per share to 1.2 pence from 5.5 pence the year before, due in part to 46.7 million pounds of losses at the British megastores, as well as a trend toward 24-month mobile contracts in Britain which has delayed renewals.

Taylor said the group was keeping its previously announced full-year financial forecasts and had seen “definitely some acceleration” in European trading following the recent launch of Apple‘s new iPhone 4S phone.


LONDON/NEW YORK (Reuters) – By Mark Potter and Dhanya Skariachan(Editing by David Holmes and Sophie Walker)


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