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Hedge Funds Hunt for Brexit Bargains

Andrea Felsted
Hedge Funds Hunt for Brexit Bargains

(Bloomberg Opinion) -- That most bargain-hungry of corporate shoppers, Elliott Management Corp., might be about to put a chunky stake in a British retailer into its basket. Paul Singer’s activist hedge fund is looking at plans to acquire a big holding in electrical goods specialist Dixons Carphone Plc, according to Sky News.

Neither Elliott nor Dixons would comment on Tuesday, and the Sky story said the fund’s investigations might come to naught. But there are several reasons why such a move would make sense. Shares in Dixons have fallen about 30 percent over the past year, as the retailer parted ways with its chief executive Sebastian James. His replacement Alex Baldock has already had to deliver a profit warning, while the company has also suffered a significant cyber-attack.

Those unhappy events have dragged Dixons’ market value down to about 1.6 billion pounds ($2.1 billion). It was close to 5 billion pounds in 2016. U.K. retailers have been hurt by Brexit’s impact on consumer sentiment, with shoppers hanging onto their mobile devices for longer. That has been bad news for Dixons’ chain of phone shops.

Elsewhere, things look a little better. The company has international businesses, for example in Sweden and Denmark, that are prospering. Non-domestic sales now make up almost 40 percent of the group total.

A simple break-up valuation for the company shows why Singer’s firm might spy upside here. If you assumed that the U.K. business was worth about 10 times its earnings before interest and tax, a pretty typical multiple for the U.K. retail sector, then you’d get a value of about 1.5 billion pounds. Applying a multiple of 13 times for the Nordic business, to reflect its strong market position, might value that unit at about 1.1 billion pounds.

Even if you stripped out the net debt of about 300 million pounds and a pension deficit of about 400 million pounds, the combined value would exceed the group’s market capitalization. Dixons Carphone also has a business in Greece, which would partially offset the debt and pension obligations.

One drawback is that Ceconomy AG, the giant German electronics retailer which would have been a possible buyer of Dixons’ Nordic arm, has just been hit by a string of profit warnings and executive departures. France’s Fnac Darty SA is looking for deals, although it has its own problems to deal with – notably disruption from the gilets jaunes protests and more cautious French consumers.

But Ceconomy’s woes might also present an opportunity for Dixons, should Elliott decide to invest. There may be scope to pick up some of Ceconomy’s assets, or even engineer a more ambitious three-way deal with Fnac Darty.

As I’ve argued, Britain’s imminent departure from the EU means it will take a brave soul to invest in U.K. retail right now Inc. is another threat. But if the direst Brexit outcomes are avoided, then consumer confidence would probably recover. Elliott is prudent to browse the January sales.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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