Best Buy Announces Joint Venture in Britain

Deal Part of Bid to Expand in Europe

Best Buy, the largest U.S. consumer electronics chain, has moved into Europe with a $2.1 billion investment in the continent's largest cellphone retailer, the companies announced yesterday.

Best Buy's 50 percent stake in a joint venture with Carphone Warehouse Group will allow it to roll out its trademark big-box stores in Europe, with the London-based company putting its 2,400 European stores in the new operation.

In a conference call with analysts, the companies said they had been speaking for four years and have collaborated for two, developing Best Buy Mobile in the United States and bringing Best Buy's Geek Squad, a 24-hour computer-support task force, to Europe.

"We believe our combined expertise has potential to result in significant financial upside as we together attempt to transform retail in Europe through the Carphone Warehouse, Phone House and Best Buy brands," said Brian J. Dunn, president and chief operating officer of Best Buy, based in Richfield, Minn.

Bradbury H. Anderson, chief executive of Best Buy, said the companies share similar cultures and customer-related skills. He said the joint venture would allow Best Buy to grow.

Citing competition, executives declined to say how many Best Buy stores would open in Europe or where, but they did say that the stores would be various sizes.

The stores will compete aggressively on prices, Anderson said. "With the name Best Buy, we have a commitment we have to live up to," he said.

The joint venture will include the Web and direct businesses of Carphone Warehouse, its insurance operations and its airtime reselling businesses.

Carphone Warehouse Group will continue to be the sole owner of its fixed-line telecom business in Britain, which includes TalkTalk, AOL Broadband and Opal; and of its share in the Virgin Mobile France joint venture.

The company said it would use the proceeds from the deal to pay down debt, invest in broadband customer growth, infrastructure and other areas. Its current European retail management team would initially remain in place, the company and Best Buy said.

Collins Stewart analyst Mark James maintained his buy recommendation on Carphone Warehouse, saying the price of the deal gave an implied valuation of $4.3 billion, exceeding the brokerage's $3.7 billion valuation.

He said the Best Buy deal raised several concerns, however, such as "the rationale of investing in consumer electronics retailing, the potential use of proceeds, and the impact on the company's financials."

In a research note, RBC Capital Markets analyst Scot Ciccarelli said the deal offers Best Buy "an intelligent and low-risk strategy to enter the European market," compared to starting from scratch.

He noted that Carphone Warehouse would get to keep its international business, and receive an injection of cash to pay down debt and invest in operations. He added that the firm would benefit from Best Buy's consumer electronics experience.

J.P. Morgan lowered Carphone Warehouse's rating to neutral from overweight, citing limited "share price upside on a 3-6 month view."

The deal is subject to approval by Carphone Warehouse shareholders at its annual general meeting in August.