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Rating Action:

Moody's changes outlook on Dixons Retail's ratings to positive; affirms ratings

16 May 2014

London, 16 May 2014 -- Moody's Investors Service has today changed to positive from stable the outlook of the B1 corporate family rating (CFR) and senior unsecured ratings and B1-PD probability of default rating of Dixons Retail plc. Concurrently, Moody's has affirmed these ratings.

"We are changing Dixons' ratings outlook to positive from stable following the company's announcement yesterday that it has agreed to merge with Carphone Warehouse," says Lola Cavanilles, a Moody's Assistant Vice President -- Analyst and lead analyst for Dixons. "The all-share merger will enhance Dixons' business profile due to Carphone's complementary geographic footprint and its expertise in the business to business segment. Additionally, we expect Dixons' financial profile to strengthen driven by Carphone's lower adjusted leverage and its higher interest coverage."

RATINGS RATIONALE

Over the next few months, Moody's will monitor the speed and method by which the transaction will strengthen Dixons´ financial structure and metrics, as well as the execution of the integration plans of the two businesses. At this juncture, Moody's notes that the deal will provide both companies with the ability to serve consumers with converging mobile devices and electrical goods, more efficiently than through the limited partnership that Dixons has with Phones4U (Phosphorus Holdco plc, B3 stable), which ends in May 2015. It will also allow Dixons to expand its business to business (B2B) services, where Carphone Warehouse (not rated) has more expertise.

Dixons expects the merger to progressively provide synergies of at least GBP80 million by the end of financial year 2017/18, mostly cost synergies, with almost half of them to be delivered in the financial year 2015/16. The merger will imply additional capital expenditure (capex) and extraordinary costs of up to GBP130 million which will be incurred over the next few years.

The new group will be more strongly positioned in the UK electrical retail sector. Dixons currently operates more than 500 stores and Carphone has almost 800. The company doesn't envisage many store closures, given the lack of overlap of the businesses, with Carphone's high street focus and Dixons' out-of-town presence. The companies' overseas geographic footprints are complementary, but with room for continued expansion. In the longer term, there is considerable potential for uplift from increased buying power and scope to be at the forefront of the increasing demand for digitally connected products such as refrigerators and boilers.

Moody's cautions that this proposed merger will trigger the change of control clause on Dixons' bonds due in 2015 and in 2017. Dixons' bondholders will have 60 days to exercise an option to require the issuer to redeem or purchase (or procure the purchase of) any of the notes. The company does not expect the put options to be exercised by its bondholders because the bonds currently trade above par. However, if the put options were to be exercised, Moody's believes that Dixons would have enough liquidity to afford this payment, on the basis of the bank facilities in place.

Moody's does not expect the transaction to be completed before the third quarter of calendar 2014.

WHAT COULD CHANGE THE RATING UP/DOWN

The ratings could be upgraded if the company's earnings were to pursue positive momentum, translating into better credit metrics including a debt/EBITDA ratio below 5.0x and an EBITA/interest expense ratio sustained at, or higher than, 2.0x.

Although improbable at this stage, negative pressure could occur if the company's operating performance or liquidity profile were to deteriorate. Quantitatively, this would translate into a debt/EBITDA ratio increasing towards 6.0x and an EBITA/interest expense ratio below 1.5x.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was the Global Retail Industry published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Hemel Hempstead, England, Dixons Retail plc is one of Europe's leading specialist consumer electrical retailers with a store portfolio of over 1,154 stores and total revenues of GBP8.4 billion as of the financial year ending 30 April 2013.

Headquartered in London, England Carphone Warehouse Europe, Carphone Warehouse Group's principal business, reported revenues of GBP3.7 billion for the year ending 30 March 2013 (FY2013). Carphone Warehouse Europe is the largest independent telecommunications retailer in Europe and had a portfolio of 2,377 stores across 8 countries in Western Europe as of FY2013.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Lola Cavanilles
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes outlook on Dixons Retail's ratings to positive; affirms ratings
No Related Data.
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