ALEX BRUMMER: Case for a probe at Phones 4u

By ALEX BRUMMER, CITY EDITOR

Updated: 17:31 EST, 24 September 2014

The Phones 4u collapse has rapidly disappeared from the radar, except for the desolation it leaves behind: The 1,700 workers who have lost their jobs, the 362 vacant stores on the high street and the bond-holders who lost out.

There is something deeply disturbing about this whole affair that requires proper investigation. As we have pointed out before, private equity does not emerge from this episode with laurels. 

The company has been through three separate forms of private-equity ownership since founder John Caudwell sold out.

Collapse: Some 1,700 Phones 4u workers who have lost their jobs and 362 stores have been closed down

The way BC Partners paid investors a £200million dividend in the last year must be regarded as unforgivable, whether such practices are typical for the industry or not.

None of this should, however, divert attention from the role of the main suppliers to Phones 4u: Vodafone and EE. In effect, it was they who hammered the nails into the coffin by cancelling the supply contracts.

 What has not been revealed until now is that Vodafone’s chief executive, Vittorio Colao, held talks with the owners of Phones 4u as late as July 9 this year. In those talks Vodafone is said to have offered to buy Phones 4u in whole or in part, so as to win additional direct distribution. It indicated it was willing to sign a new long-term supply agreement that had already been negotiated.

So it came as a huge shock to Phones 4u in August to learn that Vodafone had decided to withdraw from a 15-year contractual arrangement with no notice or warning. In the words of one of those present at the July talks, it essentially decided: ‘Why buy the stores they wanted for a pound, when they could buy them for a penny?’

The reputation of private equity and the debt it places on the balance sheets of target companies is hard to defend. As troubling, is that two main suppliers – Vodafone and EE – have respectively bought 140 and 58 of the best stores for a song.

Caudwell, who sold Phones 4u in 2006, was the first to suggest that the suppliers had behaved in a ‘predatory’ fashion. Having sold the company into private equity he may have forfeited the right to have a say.

But there is a truth in his words. Since the merger of Orange and T-Mobile to form EE, Britain’s mobile market has shrunk to three major suppliers, effectively creating an oligopoly.

They have chosen to exercise this power by cutting out the middleman, Phones 4u (Dixons Carphone is just hanging on), and to adopt a direct-sales model.

In the past, the Office for Fair Trading might have conducted a preliminary inquiry into these events. So far we have heard nothing from its successor organisation, the Competition and Markets Authority.

In the absence of such a move, Select Committee hearings or even an old-style Department of Trade inquiry should be the right response. Consumers, employees and bond-holders have been treated disgracefully and need to know what really happened.

Pile it high...

The freefall in Tesco’s share price shuddered to a halt in latest trading with the shares hovering at 194.9p and down 49 per cent over the past 12 months.

This has led to some speculation in the Square Mile that if the uncertainty over the integrity of the company’s profits is not resolved quickly and the shares continue to slide, to say 160p, then it could become a takeover candidate.

The question then becomes who? The company’s UK market share effectively rules out any of Britain’s grocers, all of which are struggling with sales at present. Wal-Mart might have been a possibility, if it didn’t own Asda.

It would be a big bite for most of the Continental food chains, which might see the group’s overseas operations as a poison pill.

The most obvious candidates would be private equity, Heaven forbid. Other potential buyers could be a sovereign wealth fund from the Middle East, a Chinese entity or even a value investor like Warren Buffett, who loves big brands and already holds a 3.98pc stake.

Colonials, such as the Weston family, with big shopping interests in Canada through Ontario-based Loblaw might be a possibility.

Even a week ago, who would have thought such speculation credible?

Happy New Year

It has not been the easiest year for Britain’s Jewish community, which saw a surge in anti-Semitic incidents and rising calls for boycotts of Israel goods as Operative Protective Edge raged in Gaza.

Some of the UK’s biggest enterprises including Sainsbury’s and Tesco stood firm in the face of the commercial boycott calls. Last night at dusk saw the start of the Jewish New Year 5775. Hopefully it will spread a panoply of peace across the whole Middle East.