A Dixons Carphone combo

In response to recently-revived speculation surrounding both companies, Dixons and Carphone Warehouse have confirmed that both companies are in talks regarding a potential merger.

Discussions are still in early stages, so the structure of a potential deal is currently unknown.

But here’s some of what we do know

Similar talks made the rounds a few years back, but discussions between both companies reportedly broke down on valuation grounds. Of course, the situation has changed somewhat since then for both Dixons and Carphone. And both companies have certainly had their fair share of problems in the recent past.

In the face of tough economic conditions, together with fierce competition from online retailers – not to mention supermarkets’ foray into selling electrical goods – Dixons, operator of the Currys and PC World brands, met with tough times. Declining sales, losses and a plunging share price followed.

But electrical goods retailer Dixons has since made way towards something of a turnaround, partly thanks to rationalisation of some underperforming businesses, as well as a decrease in competition following the demise of some rivals (remember Comet?).

Meanwhile, mobile devices retailer Carphone – once a part of TalkTalk – also met with similar difficulty. But the company has been riding high of late, partly on the back of demand for mobile devices, which remains unabated.

So, is a combination a good thing for these two?

Well, some certainly see the benefits of such a move, if market reaction is anything to go by – the share price of both companies saw a lift following the news.

Yes, both companies have relatively clean balance sheets and rising share prices, which certainly positions both well for negotiating deal terms.

And yes, a combination would of course create a larger entity, with a broader and complementary product base, which should stand a better chance of fighting off the competition.

And in the event of a merger, it would also be reasonable to expect streamlining of assets, which should help profits of the new entity.

Conditions currently seem favourable but competition is heavy

The combined entity might be larger but it will still be bite-sized relative to supermarket heavyweights, for instance, which have deeper pockets and an eye on this sector. Indeed, imminent success is by no means guaranteed.

Of course, given that these merger discussions are still very much at the early stages, the current buzz may yet come to nought.