AO World to buy Mobile Phones Direct in £32.5m deal
By Michele Maatouk
Date: Friday 09 Nov 2018
(Sharecast News) - Online electrical goods retailer AO World has conditionally agreed to buy UK-based online-only mobile phones retailer Mobile Phones Direct in a cash and share deal worth £32.5m.
The total consideration for the deal is approximately £38.1m, which will be satisfied by £20.9m in cash and just under 13.1m AO shares.
The business operates through two online brands - Mobile Phones Direct (MPD) and Smart Phone Company. MPD's websites had around 13.6 million visitors last year, up from 11.6m the year before, and the business generated revenues of £121.7m and earnings before interest, taxes, depreciation and amortisation of £5.5m in the year to the end of March 2018.
AO said the deal will "significantly" increase the scale and sophistication of its mobile proposition, which is currently limited to the sale of handsets without airtime or associated services. It said the combination of breadth of product and services across the two businesses presents a significantly improved offering for the combined customer base.
Chief executive officer Steve Caunce said: "This deal represents a significant step forward in our strategy of developing our growing range of online electricals and adding new complementary categories that customers want and expect from AO.
"Mobile Phones Direct already has a leading position within the UK online mobile phone market and is a business which is highly complementary to AO. In coming together, AO will achieve instant scale and be well-placed for future opportunities within a highly attractive and growing UK mobile phone market.
"With 5G services expected to launch over the next two years and as the electrical products we sell become more connected than ever before, moving further into the mobile market is a logical next step for us."
AO World also gave a brief update on trading. In the six months to 30 September, group revenue rose 9.9% to £404.2m, with UK revenue up 5.7% to £334.8m and EU revenue up 35.5% to £69.4m.
The group said it was performing well in the UK against the backdrop of a declining major domestic appliances (MDA) market, maintaining share in the category.
As for Europe, it said the revenue growth rate in the second quarter was less than the rate in recent periods, partly due to a challenging MDA market in Germany and also as a change in the driver operating model meant that delivery capacities were limited to some extent through August and September. However, the group expects the growth rate to return to targeted levels.
"Despite the weaker trading environment, AO remains on track with its strategic plan and is well placed to capitalise on the forthcoming peak trading period. Customer satisfaction levels remain exceptional and an increase in brand awareness resulting from the new brand campaign is encouraging.
"Consequently, the board believes full year results will fall within the range of its expectations, albeit more second half weighted than previously anticipated."
At 0915 GMT, the shares were down 4.6% to 128.80p.
Shore Capital analyst Greg Lawless said: "Whilst the acquisition multiple looks attractive and scales the company in a new category, we do not see how this can be earnings enhancing and the statement doesn't highlight this, suggesting our initial view might be correct.
"On the one hand this small acquisition scales up the company in a complimentary category but also complicates the group further. The AO World investment thesis was to shakeup the MDA market and clearly the UK and German electrical markets remain challenging. We reiterate our 'sell' rating."
Russ Mould, investment director at AJ Bell, said: "An acquisition announced by online consumer electrical retailer AO World today can't distract from a weak trading update.
"Strategically, it will help AO to expand its reach across the broader electrical market. Yet it may not provide an immediate solution to the key problem with the business - i.e. when will it actually make sustainable profits?
"AO has developed a good reputation for strong customer service and its website has a wide range of goods. Unfortunately sales haven't been strong enough to offset the cost of doing business, so it still isn't making money.
"It reported a £7 million pre-tax loss in the year to March 2017, expanding to a £13.5 million pre-tax loss in the following year. The consensus forecast among analysts is for AO to continue being loss-making until the year ending March 2020. At that point it is expected to squeeze out a mere £2.45 million pre-tax profit."
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