Phones go dead at Phones4U

Mobile phone chain Phones4U collapsed into administration this week. Its major suppliers had abandoned it in recent months, with EE the last to go.

Having lost the sources for almost all of its sales, and with debts worth £635m (compared to operating earnings of £105m in 2013), the company’s creditors pulled the plug, leaving almost 6,000 jobs at risk.

Its owners, private-equity group BC Partners, blamed the mobile operators for the firm’s demise, while they blamed BC Partners for milking the business too hard. Founder John Caudwell, who sold to private equity in 2011, blamed both.

What the commentators said

The operators’ view of events looks more credible, reckoned Nils Pratley on Phones4U said that Vodafone and EE’s decisions to stop supplying it had come as a shock. “Really?” Both Three and O2 had already stopped allowing the retailer to sell its products.

“It was hardly beyond the realms of possibility that the other big… operators would follow.” Indeed, Vodafone “has been banging on for at least a year” about how it wants to sell more through its own shops and website.

Operators’ profit margins have been squeezed as regulators crack down on the fees they can charge, noted Christopher Williams in The Daily Telegraph. So it’s no surprise they have been “eyeing the share of handset and contract sales taken by middlemen such as Phones4U”.

But while the writing was on the wall, BG’s financial engineering didn’t help. It took out a £200m dividend by piling on debt. This meant it got back the equity it had put into the group – and then some – but the higher gearing meant higher debt repayments. These made it harder to offer the likes of Vodafone appealing terms.

Caudwell shares some of the blame, said Chris Blackhurst in The Independent. Private equity’s top priority is “a quick return and a smart exit”. Once they had got their hands on Phones4U, it was unlikely ever to become “a growing, booming business with a market-leading, long-term future”.

The upshot, for now, is that rival “Carphone is sitting pretty”. But if the networks stick to wanting to do their own selling, how long will this last?

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