Carphone hit by credit crunch, little news on European JV

Carphone Warehouse, Europe's largest mobile phone retailer and the UK's third biggest broadband provider, has revised its targets for mobile connections and broadband subscriptions in the current economic climate.

The company's CEO, Charles Dunstone, said the group was targeting mobile connections growth of 8-10% in the coming year, despite connections being up 12% in the first 12 weeks of the year. In 2007, mobile connections rose 15% to 11.5 million.

He added that net broadband connections so far this financial year were lower than expected, due to the falling housing market and greater wireless broadband sales.

Carphone Warehouse's shares fell by 15% immediately after these comments, the latest in a succession of warnings.

For starters, incumbent BT is trying to increase the fees that UK broadband providers have to pay BT Openreach for unbundled local loop lines. With some 2.6 million broadband customers, this will hit Carphone Warehouse's profits hard (and all other providers who have a wholesale deal to provide broadband using BT's access infrastructure) if Ofcom allows the proposed rise to go through.

BT's application and the other service providers' appeal against is has been with Ofcom for several months already and there is no end of the dispute in sight.

Secondly, Carphone Warehouse made much of its play for Italian-owned broadband provider Tiscali earlier this year, but it failed to acquire it because offer of about £550 million (€11.38 million) for the UK broadband operations was seen as too low. With Tiscali's UK assets, Carphone would have had 4.6 million UK broadband customers, ahead of BT and Virgin Media, the cable operator.

Thirdly some mystery surrounds the progress of the European joint venture that Carphone Warehouse signed with Best Buy of the US. Jokey comments from Dunstone have given rise to speculation among analysts that Carphone Warehouse is thinking of quitting retail altogether and that it might be a take-over target itself.

Dunstone has denied both, although he has said he sees the future as being about internet services and laptops - hence the Best Buy deal.

Best Buy is paying Carphone £1.1 billion (€1.39 billion) in cash for a 50% stake in the new business. Carphone, meanwhile, is putting all its retail assets into the venture, including 2,400 mobile phone stores in nine European countries.

Fourthly, shares took a dive in April after Dunstone disclosed net debt of £850 million (€1 million) at March 31. Carphone plans to use the £1.1 billion from Best Buy to pay the debt.

While Dunstone was issuing today's warnings about the effects of the poor economic climate, he declined to provide any more information about the Best Buy arrangements. The deal is expected to be concluded by the end of the month.

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