Independent Blog - Graham Knight

13 March 2008

Back in April 2005, Dixons surprised the retail world by announcing that it had signed an agreement that gave DSGi the option to buy the Russian Eldorado chain of electronic shops.

It looked a marvellous deal, as Dixons had, at no cost to DSGi, an option to buy the 1000-shop Eldorado business for a fixed price and even an agreement to pay for by instalments over a period of several years.

At the time, John Clare, the then CEO at DSG said: “This is a great opportunity for the Dixons Group and is consistent with our growth strategy.

“Russia is a market with enormous potential and Eldorado Group is the ideal strategic partner. It has a clear leadership position in the market, a strong management team with impressive retail skills and an exceptional track record of rapid, profitable growth.

“By entering into this agreement we will work closely with Eldorado Group management to develop a better understanding of the Russian market before committing the group financially."

Dixons then sent some of its top staff to work in Russia and help with the purchasing and accounting departments at the burgeoning Eldorado business.

When I visited Eldorado stores in Kiev, it was obvious that Eldorado had already copied much of Dixons’s style.

Dixons's option to purchase Eldorado at a fixed price was viewed positively by the City. Dixons shares jumped up in value.

It seemed like a great deal. Some commentators applied the well-known Black-Scholes formula to value the option, for which Dixons had paid absolutely nothing, at more than £100m.

Last year, DSGi announced that the deal was off. The cancellation followed an 18-month period when Dixons obviously learned a great deal more about the company and its internal accounting practices.

DSGi was criticised for investing so much work in the Russian project – only to abandon it three months before it was due to pay its first instalment and take up its option to purchase Eldorado.

DSG shares were £2 when it first announced the Eldorado agreement. As I write this, the shares are now down to 60p – as low as they have been for 12 years.

Dixons's decision not to invest in Russia may still prove to be a very wise move.

Last week, the Russian tax authorities hit Eldorado with a tax bill for over £300m and that was just for the sales up until 2005.

Perhaps investors will now appreciate DSGi’s astuteness in not investing in Russia and the shares will start to move upwards.

Surely they can’t go much lower.


Independent Blog - Graham Knight	Back
13 March 2008 Back in April 2005, Dixons surprised the retail world by announcing that it had signed an agreement that gave DSGi the option to buy the Russian Eldorado chain of electronic shops. It looked a marvellous deal, as Dixons had, at no cost to DSGi, an option to buy the 1000-shop Eldorado business for a fixed price and even an agreement to pay for by instalments over a period of several years. At the time, John Clare, the then CEO at DSG said: “This is a great opportunity for the Dixons Group and is consistent with our growth strategy. “Russia is a market with enormous potential and Eldorado Group is the ideal strategic partner. It has a clear leadership position in the market, a strong management team with impressive retail skills and an exceptional track record of rapid, profitable growth. “By entering into this agreement we will work closely with Eldorado Group management to develop a better understanding of the Russian market before committing the group financially." Dixons then sent some of its top staff to work in Russia and help with the purchasing and accounting departments at the burgeoning Eldorado business. When I visited Eldorado stores in Kiev, it was obvious that Eldorado had already copied much of Dixons’s style. Dixons's option to purchase Eldorado at a fixed price was viewed positively by the City. Dixons shares jumped up in value. It seemed like a great deal. Some commentators applied the well-known Black-Scholes formula to value the option, for which Dixons had paid absolutely nothing, at more than £100m. Last year, DSGi announced that the deal was off. The cancellation followed an 18-month period when Dixons obviously learned a great deal more about the company and its internal accounting practices. DSGi was criticised for investing so much work in the Russian project – only to abandon it three months before it was due to pay its first instalment and take up its option to purchase Eldorado. DSG shares were £2 when it first announced the Eldorado agreement. As I write this, the shares are now down to 60p – as low as they have been for 12 years. Dixons's decision not to invest in Russia may still prove to be a very wise move. Last week, the Russian tax authorities hit Eldorado with a tax bill for over £300m and that was just for the sales up until 2005. Perhaps investors will now appreciate DSGi’s astuteness in not investing in Russia and the shares will start to move upwards. Surely they can’t go much lower.