PC World-to-Currys owner Dixons Retail (DXNS) dips 5.8% to 48p despite announcing its hotly-anticipated merger of equals with Carphone Warehouse (CPW), 4.3% cheaper at 313.6p. The recommended all-share deal creates 'Dixons Carphone', a £3.8 billion retail powerhouse better-equipped to benefit from the soaring number of devices connected to the internet.

Web chart - Dixons - May 2014

Earlier this year (24 Feb) the FTSE 250 companies, with broadly similar market price tags of £1.7 billion (Dixons) and £1.8 billion (Carphone), disclosed talks were afoot. Today, they confirm a merger that will give Dixons' and Carphone's shareholders ownership of a European leader in consumer electricals, mobiles, connectivity and services.

The blockbuster retail deal, which will see Carphone chairman Charles Dunstone occupy the chair and Dixons boss Sebastian James in the CEO hot seat, should deliver at least £80 million of savings and synergies by 2017/2018. Yet the pair proclaim it is really about growth for a digital age as their markets converge and they become increasingly-complementary businesses.

Smartphone and tablet proliferation, the rising speed of internet access both in and out of the home and growth in the number of connected devices are trends changing the way people live their lives and providing the building blocks for the so-called 'Internet of Things'. This is creating opportunities for retailers to sell devices and associated services that help consumers in this connected world.

As James argues, 'the ability to take what we have built in electrical retailing and add the profound expertise of Carphone Warehouse in connectivity would make us a leading force in retailing for a connected world. Together, we can create a seamless experience for our customers that will enable technology to deliver what it promises - that is, to make their lives better.'

Freddie George, retail number cruncher at Cantor Fitzgerald, points out that Carphone 'is the largest retailer of mobile phones in the UK, but is seeking to develop sales in adjacent categories, such as tablets, while Dixons has been openly looking to increase its mobile offering due to the growth in mobile commerce and the convergence of technologies, particularly in the home.'

Share price falls at both firms reflects a certain scepticism over whether the deal will produce better growth. Carphone, whose brand name appears anachronistic, has over 2,000 stores in seven European countries and Dixons has more than 940 shops in nine countries.

George believes the merger 'is more compelling to Dixons although it is unlikely to be interested in CPW’s European operations, which includes Virgin Mobile in France and stores in several European markets. We believe, however, there is a small chance the merger will be referred to the Monopolies Commission because of the overlap in product segments and the service dominance of the two businesses.'

Today's merger news overshadows a strong fourth quarter and full-year update from Dixons, which expects taxable profits for the year to 30 April will be 'at the top end of market expectations' of between £150 million to £160 million. Last year, the retailer pruned its business portfolio through the disposals of French online retailer PIXmania, UniEuro in Italy and Electroworld in Turkey, a restructuring enabling it to focus on dominant market positions in the UK and Scandinavia.

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Issue Date: 15 May 2014