Inside Phones 4u’s Dial-A-Phone deal

Inside Phones 4u’s Dial-A-Phone deal

Dial-A-Phone co-owner Richard Frank was sipping rum by the pool in Jamaica this week, as the final touches were being put to Phones 4u’s £9m purchase of the company Frank founded with partner Jonathan Beck in October 1995.

It appeared that Frank had just cut his losses with a company that has seen sales collapse over the last 18 months. But sources close to the company revealed that Dial-A-Phone had turned its business model around in that period to base its income on insurance and ongoing revenue from operators.

How much was the deal worth? 

The exiting owners have managed to keep hold of that cash cow; an insurance business valued at around £35m, and ongoing revenues worth £25m. The joke that Frank was not just on holiday in Jamaica but shopping for a palatial compound started to make more sense.

Nine million pounds was simply the price Phones 4u paid for the brand and core assets. A ‘For Sale’ had been hoist on Dial-A-Phone for some time, according to those close to the business, but the ongoing revenues and insurance tangled up in the company had obstructed a deal in the past.

The impending hike in capital gains tax from 10% to 18% this April is believed to have speeded up the sale. It is difficult to exaggerate the importance of the recurring revenue on the business. Sources close to Dial-A-Phone said the retailer was making virtually nothing from its contract sales, often running them as loss leaders, for at least the last two years. The real money was made by signing up those contract customers onto lucrative insurance schemes.

Dial-A-Phone partnered with insurance firm Allianz several years ago. More recently, the decision was made by Frank, Beck and 49% shareholder Barclays Private Equity to switch to an ongoing revenue model as Dial-A-Phone’s contract sales plummeted. The profits from the recurring revenues kicked in last year as the customers it signed up after ongoing deals with the likes of O2 started to bear fruit.

Companies House figures posted in the middle of last year show that sales fell from £160m in 2006 to £90m last year. While, curiously, pre-tax profits jumped to £19m from just £250,000 over the same period.

The £60m valuation is based on how long the insurance and ongoing revenue will last before they gradually tail off over the coming years.

There are more than 300,000 customers on Dial-A-Phone’s current insurance scheme, and sources say the churn level from the insurance is ‘very respectable’.

The exiting owners are also understood to pocket the £15m of cash that is in the business at the time of the sale.

Phones 4u to bring Vodafone and Orange back on Dial-A-Phone

Dial-A-Phone has lost several operators in recent years. Vodafone pulled out from the online business shortly after pulling out of The Link, and before it withdrew from Carphone Warehouse in autumn 2006. Orange and 3 also pulled back from
Dial-A-Phone last year.

T-Mobile stopped using Dial-A-Phone as a partner under former MD Brian McBride’s tenure. The operator went back in around the time it launched Flext in 2006.

Along with T-Mobile, O2 is Dial-A-Phone’s most important network partner. Both networks are believed to have been picking up between 3,000 and 4,000 contracts per month through Dial-A-Phone recently.

Phones 4u hasn’t connected T-Mobile at all for several months, focusing its entire business on long-term deals with key partner Vodafone, and more recently Orange. It also has deals in place with 3 and O2 – albeit in a smaller form.

Dial-A-Phone has been tainted with the ‘poor-quality customers’ tag in light of the operator withdrawals. However, network sources have said Dial-A-Phone customers are good spenders with relatively high ARPU, but have a higher than average propensity to leave the network at the end of their contract agreements.

A Phones 4u source confirmed it will use Dial-A-Phone to push its key suppliers, Vodafone and Orange. With Dial-A-Phone’s customers being lower quality, both networks will be undoubtedly monitoring the impact the Dial-A-Phone acquisition will have on Phones 4u ARPU and churn.

A source close to Phones 4u said: ‘You have to accept that the customer who comes through web and off-the-page is a value seeker.’ But he added: ‘Their ARPU is so high at the moment that they can afford to dilute it.’

Phones 4u has committed to ARPU and churn levels with Vodafone and Orange it can’t afford to destabilise.

‘We are comfortable with the quality of the customers they [Dial-A-Phone] sign, and we would be happy to work with the networks on a revenue share model because of that,’ Whiting said.

For T-Mobile, there is a risk that the combined Phones 4u-Dial-A-Phone enterprise will become a more powerful connector, with speculation that the added buying power will give it a boost of 10,000 extra connections per month. This would mean T-Mobile would not only lose the connections it was getting from Dial-A-Phone, but could risk being priced out of Phones 4u.

How Carphone went after Dial-A-Phone in 2005

Dial-A-Phone was identified as a major threat by Carphone when it saw Dial-A-Phone’s share in the contract market was up to 26% at peaks in 2004 and 2005. Phones 4u had a similar share and Carphone was hovering around 35%. But both retailers were doing it with the huge costs of stores.

This was in the middle of the 3 boom, when 3 was piling commissions into the market. Dial-A-Phone picked up over 40,000 contracts per month in 2004. That dropped to less than 10,000 after a targeted assault from Carphone, and the downturn in the contract market, especially through cashback. Carphone is rumoured to have considered buying Dial-A-Phone at the time but was turned away by price valuations around £60m.

Instead, Carphone set about to bring down Dial-A-Phone’s price by taking market share by swamping the online market with deals it believed Dial-A-Phone couldn’t match.

It also tried to swamp the back pages of the tabloid newspapers with its E2Save business which it acquired, and latterly the £7m acquisition of Dial-A-Phone’s closest rival, OneStopPhoneShop.

Carphone wanted to fatten up the two online retailers using its superior buying power, planning to either squeeze out Dial-A-Phone from the market or at the very least cut its market value.

4u buys online giant to crank up sales

Phones 4u’s CEO, Tim Whiting, and COO, Phil Dobson, led the deal that gives Phones 4u ownership of arguably the biggest brand in online and off-the-page mobile retail.

Whiting was backed by private equity parent company Providence Equity Partners. It is the first major purchase since the £1bn purchase from John Caudwell in August 2006.

Phones 4u has sorely lacked a serious online and off-the-page operation for some time. It now has the potential to build a multi-channel retail powerhouse to take on Carphone Warehouse toe-to-toe.

‘We have been very clear that we want to increase our share of web and off-the-page sales, and this is an opportunity to do that and to increase our skill set. It’s a business we have been watching for a while. They are guys that really understand a particular part of a market, and the web is an area we have never been strong in,’ Whiting said.

The Dial-A-Phone purchase includes the brand, goodwill and expertise of arguably the biggest name in the online/off-the-page market.

Phones 4u has bought all of Dial-A-Phone’s technical infrastructure, including the sophisticated software and back-end system

Written by Mobile Today
Mobile Today

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