It’s always disappointing to see a company go into administration, with the main reason being the inevitable loss of jobs that results from it. However, to see a highly profitable company such as Phones 4U go into administration is a much rarer event. Looking at it from a purely investment-related standpoint, though, it could be good news for Vodafone (LSE: VOD) and Dixons Carphone (LSE: DC). Here’s why.
One Less Competitor
The reason that Phones 4U has entered administration is quite simple: a loss of suppliers. Indeed, Vodafone announced around six months ago that it would cease supplying the company and, this week, rival EE did the same thing. This means that, from September 2015, Phones 4U would have nothing to sell and so decided to fold now rather than wait for what it felt was the inevitable.
Clearly, there is a limited number of potential suppliers (few of whom are as big as Vodafone or EE) and so the future appeared to lack promise for the company. This could turn out to be good news for Vodafone and Dixons Carphone because, to put it simply, it means there is one less competitor on the high street. In turn, this could mean higher profitability for the two companies moving forward.
A Potential Opportunity
Indeed, Phones 4U seemed to fill a key void in the mobile phone business. It was something of a ‘comparison’ mobile phone shop, in terms of offering handsets and deals from a range of suppliers so as to ensure its customers were getting the best deal. While Carphone Warehouse has done the same thing, Dixons Carphone seems to be moving away from this offering as it seeks to be the hub of all things technology-based, as opposed to a ‘comparison’ mobile phone seller.
As a result, it seems likely that there is an opportunity for both Vodafone and Dixons Carphone in particular to now fill the void left by Phones 4U which, although in administration, was popular with customers and made a profit of over £100 million last year. This opportunity could prove to be highly lucrative for Vodafone and Dixons Carphone moving forward.
Looking Ahead
With Dixons Carphone being a relatively new business, Phones 4U going into administration has come at a good time. It provides the company with further growth opportunities, although as its most recent update showed, it is making encouraging progress nonetheless. With earnings set to increase by 22% in the current year and by 18% next year, the new business could be in the midst of a purple patch.
Meanwhile, Vodafone could do with a short term boost to its bottom line. Its strategy of buying undervalued European assets looks to be a sound one, but could take time to come good. Despite this, the company has huge financial firepower and could make major acquisitions moving forward. With a yield of 5.6%, it remains a top income play.
