Carphone Deal Looks Tempting

Ambitious Carphone Warehouse (LSE: CPW)  is boosting its retail operations in Europe through a joint venture with US retailer Best Buy. The deal has been greeted without enthusiasm by UK investors but it could represent a buying opportunity at Carphone.

Best Buy is putting up £1bn for a 50% stake in the joint venture while Carphone is contributing its distribution business.

The cash will provide Carphone with the opportunity to expand its broadband service, which is now thriving after an inauspicious start when it was overwhelmed by demand. It will have the chance to buy weaker rivals wanting to get out. One distinct possibility is a bid for the UK operations of Tiscali, which are up for sale.

There are several advantages to the link with Best Buy, one of the biggest retailers in the US. The two groups already have a couple of joint ventures on the go so they know they can work together. Best Buy took a 3% stake in Carphone last year.

The joint venture will be able to replicate Best Buy's larger US stores, which sell laptops and consumer electrical goods alongside mobile phones. Bigger stores could be coming here as well as to continental Europe.

While Carphone already has outlets in eight European countries, including France, Spain and Portugal, the joint venture will give it far more muscle. With Best Buy keen to get a foothold on the Continent, its interests coincide with those of Carphone.

Best Buy also has outlets in Canada and China, where Carphone has yet to open.

These potential benefits failed to impress investors and Carphone Warehouse shares fell 5p to 295p in an initial reaction to the deal.

There have been fears that Charles Dunstone, founder of Carphone Warehouse and the driving force behind its remarkable expansion, was thinking of moving on.  His 30% stake in the company suggests otherwise -- unless someone wants to buy him out, which would mean making an offer for the entire company.

Of greater concern is whether Dunstone has over-extended his company, as he did when he launched into broadband. Tales of highly successful companies whose soaring shares suddenly collapse litter the stock exchange. Plumbing specialist Wolseley (LSE: WOS) , cake maker Inter-Link Foods and equipment supplier Speedy Hire (LSE: SDY)  are three prime examples.

This is a serious risk. Within the telecom industry, even mighty Vodafone (LSE: VOD)  made international deals that had to be unscrambled.

Carphone Warehouse shares raced up from 50p at the end of the bear market in March 2003 to 360p in mid 2006 but 12 months later they had struggled up only another 15p. For nearly a year now they have been slipping.

This latest deal could kick start the shares again. They trade on a prospective price/earnings ratio of 12.4, fractionally higher than the sector average but not particularly demanding. One drawback is the ungenerous prospective yield of under 2%.

The fourth quarter trading update last month received a mixed reaction. The main reason was the increase in debt, which is now no longer going to be a problem.

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