DIXONS/CARPHONE

Institutional attention and FTSE 100 inclusion the next step?

 

• The new Dixons Carphone company will have a mkt cap of GBP 3.85bn. We feel this will put it back on the radar of big institutions and analyst attention will turn to them again (currently poorly covered). They will also become a candidate for FTSE inclusion.
• The company says that the merger only needs two court hearing approvals early this week for the merger to complete.
• The combined DXNS/CPW group will start trading on the 7th August. (Last day of trading separately is tomorrow). The terms are 0.155 CPW for every DXNS NewCo share. Currently trading near terms.
• There will be a FTSE 250m release after the close today . Chatting to FTSE they said they did not know the specific content of this release. We expect limited buying pressure from any changes. DXNS says they do not reckon they will be large enough to enter the FTSE 100.
• Next reweight announcement for the FTSE 100 will be on the 3rd September and effective on the 22nd September.
• Looking at the current market caps of the two groups we get to GBP 3.85 bn and comparing this to the reserve list we see that they are very close to getting in:

MERL LN – GBP 4.53 bn
DLG LN – GBP 4.25 bn
COB LN – GBP 3.77 bn
TW/ LN – GBP 3.64 bn
AMEC LN – GBP 3.22 bn
CRDA LN – GBP 3.07 bn

Companies with market caps below 4bn currently in the FTSE100:
SGE LN – GBP 3.97 bn
SPD LN – GBP 3.97 bn
MRW LN – GBP 3.96 bn
IMI LN – GBP 3.92 bn
GFS LN – GBP 3.90 bn
PSN LN – GBP 3.85 bn
PFC LN – GBP 3.84 bn
STJ LN – GBP 3.72 bn
III LN – GBP 3.63 bn
REX LN – GBP 3.53 bn
BDEV LN – GBP 3.46 bn

• With where the reserve list is currently trading we would expect the combined DXNS/CPW to make the reserve list, while perhaps not being the top candidate for immediate entry.
• With both companies only being components of the FTSE 250 they have been outside of the focus zone for most institutional investors whereas with an entry on the reserve list for the FTSE 100 this would very likely change and push them even further up the list.
• Keep in mind that the reserve list might become very relevant if and when SHP delists.
• It is very difficult to value the combined group to its peers as the peers are only a fraction of the groups size which is to the combined groups advantage.
• We see a long position in both DXNS and CPW into today’s announcement as a trade with fairly small downside with the upside potential that the FTSE announcement opens the eyes of the institutional investors realizing the economics of scale advantage of the group relative to its comps as well as a potential FTSE 100 entry/ Reserve list entry.
• http://www.ftse.com/tech_notices/2014/Q3/88103_20140723_Dixons_Carphone_Merger_Indicative.jsp