Best Buy Exits Europe With Stake Sale In Joint Venture With Carphone Warehouse

Electronics retailer Best Buy (NYSE:BBY) has announced that it is selling its 50% stake in Best Buy Europe, the joint venture with Carphone Warehouse Group (CPW), Europe’s biggest independent mobile phone retailer. Best Buy Europe consists of CPW’s former retail and distribution business with nearly 2,400 small-format The Carphone Warehouse and The Phone House stores, online channels, device insurance operations, and mobile and fixed-line telecommunication services. ^[1]

The stake will be sold back to Carphone Warehouse for approximately $775 million or 500 million pounds. While 420 million pounds will be paid in cash, the rest will be in the form of Carphone Warehouse stock, subject to a 12-month lock-up restriction. The deal is subject to approval by the shareholders of Carphone Warehouse. It is expected to close by the end of June. ((Best Buy to Sell its Stake in European Business to Carphone Warehouse, Best Buy News Release))

The deal will end Best Buy’s presence in Europe. It signals that Best Buy is more keen to focus on the domestic U.S. market where it is facing formidable challenges from players like Wal-Mart and Amazon. The company needs a strong balance sheet to meet its expansion targets in the U.S. and this deal seems to be a step in that direction. ^[2]

See our full analysis for Best Buy

Background

Best Buy had formed a joint venture with Carphone Warehouse in 2008 by spending $2.15 billion. The idea was to tap the potential in the European market as its sales in the U.S. had begun to stagnate. The initial plan was to build American style big box electronics stores in Europe, but later the two companies also agreed to build a chain of mobile phone stores in the U.S. on a revenue sharing basis. The plan to build big box stores was abandoned in 2011, presumably because of the viability of this format amid weak economic conditions. ^[3]

Best Buy eventually closed its initial big box stores in the U.K. and agreed to pay Carphone Warehouse $1.3 billion for the latter’s stake in the U.S. phone chain, Best Buy Mobile. Best Buy Mobile provides a comprehensive assortment of mobile phones, accessories and related services in all U.S. Best Buy stores, as well as stand-alone stores.

Going Forward

Beginning in the first quarter of this fiscal year, Best Buy will report the results of the Best Buy Europe joint venture in discontinued operations. In the first quarter, it will take an estimated non-cash asset impairment charge of approximately $200 million, associated with accumulated foreign currency translation losses that will be written off at the time of closing. Best Buy will also pay Carphone Warehouse $45 million to end another venture to partner with mobile-phone stores in other countries.

Prior to entering into this agreement, U.S. GAAP revenues for Best Buy Europe in the ongoing fiscal year were expected to be in the range of $5.5 to $5.6 billion. Hence, by virtue of a 50% stake the impact on Best Buy’s revenues this year will be around $2.8 billion.

Hubert Joly, the CEO of Best Buy, has opined that the deal will help the company to simplify its business, improve its return on invested capital (ROIC), and increase the balance sheet strength. He ruled out getting out of businesses in other geographies like Mexico, Canada and China.

We think that the cash from this transaction will be used to further expand Best Buy mobile and make investments in altering the product mix at its outlets. The company has identified certain items which customers prefer to buy from stores rather than online, such as washing machines. Best Buy has also formed a partnership with Samsung under which the latter is opening its stores within Best Buy outlets. Samsung shops are expected to be a big part of Best Buy’s future and may hold the key to its turnaround. This would naturally require Best Buy to make substantial investments for which a strong balance sheet would be a prerequisite. ^[4]

We have a price estimate for Best Buy of $20.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Best Buy 2012 10-KT, SEC [↩]
2. Best Buy Sells Europe Business Back to Carphone Warehouse, WSJ [↩]
3. Best Buy plans to exit Europe by selling stake to Carphone, Reuters [↩]
4. Best Buy Tries To Solve Big Box Puzzle, Huffington Post [↩]