There was upbeat news for Dixons (LSE: DXNS) and Carphone Warehouse (LSE: CPW) this week when the European Commission approved their £3.8 billion merger that was initially announced in May. With both companies also reporting this week, how are they faring ahead of the merger? More importantly, should investors buy a stake in the new entity?
Impressive Annual Results
Both Dixons and Carphone warehouse released impressive full-year results. For example, Dixons saw pre-tax profit increase by 53% versus the prior year, while Carphone Warehouse’s pre-tax profit increased from £3 million last year to £67 million this year. Indeed, both companies showed a vast improvement after struggling to grow profits in previous years, partly as a result of weak demand for their products resulting from an exposure to the UK and Irish economies (Dixons) and the European economy (Carphone Warehouse).
Can Profits Keep Growing?
Of course, it is highly unlikely that the merged company will be able to deliver such strong bottom-line growth going forward. Certainly, a merger can help two businesses to reduce costs (as Dixons in particular has been doing in recent years), but years prior to the one just reported were notably difficult for both companies (and, therefore, weak comparators), so it is likely that earnings growth will settle down to more normal levels in future. Indeed, neither company is forecast to increase earnings per share (EPS) at a double-digit rate over the next two years.
Will The Merger Be Successful?
As well as various administrative synergies, the new group is hoping to take advantage of the so-called ‘internet of things’, whereby appliances such as fridges, lighting and such like can be controlled via a smartphone. Clearly, there is vast potential in this market and, by merging, the two companies should be able to provide consumers with a much more holistic offering and this could be the key to increasing take-up of smartphone-enabled appliances in the long run.
As such, the merger undoubtedly has a significant amount of potential. It may take time for the benefits to be felt, since mergers can lead to internal challenges and disruption, but if the internet of things really does take off, the new entity could be at the forefront of providing it in a consumer-friendly way. This could be the catalyst to boost the merged company’s bottom-line in the long run.
