On Thursday, a new blow was suffered by Phones4U as Moody’s, the ratings agency, sent warnings to clients that the mobile phone retailer has been placed under review owing to a downgrade. This measure could lead the company to face more difficulty in raising funds.
This was preceded by Monday’s decision by Vodafone that the contract with Phones4U would not be renewed, which would be responsible for cutting down the retailer from a large chunk of the market from where one-fifth of its gross profits and revenues were generated last year.
BC Partners, the private equity firm, owns the company. At present, Phones4U has a sole deal in place with EE, one of the prime four mobile networks. Currently, the deal is also under review, so there is the high possibility that renewal of this would not take place.
As stated by Moody’s, all of the ratings concerning Phones4U debt would be reviewed. This includes the chances of default rating along with the ratings for those bonds that are traded across the Irish stock exchange.
It is implicit that Vodafone’s choice to discard Phones4U in support of intensifying bonds with its competitor Dixons Carphone was in some measure provoked by the decision of BC Partners in early 2014 to issue over £200m in the form of bonds, following which the same amount would be paid to it in a one-off cash dividend. According to a source, the mobile operator perceived this as a sign that a bright future in the business was not seen by the private equity owners.
As per a source connected to BC Partners, the primary reason behind the dividend was the distribution of the proceeds after the sale of a division in the year 2013. In the business, Phones4U possessed £100m cash following the refinancing. It continued to go for significant investment in the business after that. Therefore the opinion that they did not view any long term future can be ruled out.
The supporters of BC Partners point out the financial potential during the phase when the bond was issued as the evidence saying that the dividend did not exhibit a lack of trust in the business.
The relations with third party retailers were placed under review by Vodafone as an endeavor to boost the number of subscribers with whom the dealing are done directly with a better margin. The same process is being undertaken by EE wherein it is comparing Phones4U with Dixons Carphone. However, a decision has not yet been taken. EE, the largest mobile operator of Britain, might remove itself from Dixons Carphone.
According to Moody’s, with the probability of losing two operators, the prospects of Phones 4U has also been affected negatively through the deal that enables it to offer concessions in certain stores of Dixons Carphone. Moody’s expectations are that the liquidity profile of Phones 4U would remain ample for the time being and would carry on being credit supportive.
When requested for comments, no response was available from BC Partners.