The collapse of Phones 4u was a contract killing

The demise of Phones 4u stinks. One of the most recognisable high street retailers looks to have been forced out of business by a combination of private equity mismanagement and predatory mobile phone networks, leaving over 2,300 people without jobs.

On the face of things Phones 4u was a successful company, turning a profit of over £110m in the last financial year, but the rot went right down to the core. The company’s demise can be traced back to 2011 when it was sold to private equity firm BC Partners. Many struggling businesses flourish under the ownership of private equity but Phones 4u was instead squeezed dry.

As noted by the Financial Times Phones 4u’s private equity owners burdened it with massive levels of debt. Last autumn Phones 4u borrowed £200m to pay BC Partners a dividend, allowing investors to make a 30 per cent return on their initial investment. The payday was great news for investors but a crippling blow for Phones 4u.

That financial position made it vulnerable, especially given that its business model relied entirely on mobile networks letting the company sell their contracts through its stores. If the likes of EE, O2, Three and Vodafone didn’t sign contracts to let Phones 4u sell on their behalf then it would be in trouble. With Phones 4u that’s exactly what happened.

Mobile networks used to depend on Phones 4u and Carphone Warehouse to sell their handsets, but more and more sales are now made directly. Cutting out the middle man has proven more profitable for the likes of EE, O2, Three and Vodafone, who between them have more than 1,600 high street stores. In 2012 Three was the first network to walk away from Phones 4u, but few could have foreseen the retailer’s rapid decline.

In February this year Carphone Warehouse merged with Dixons Retail, putting at risk the 160 Phones 4u concessions in Dixons-owned Currys and PC World. Mobile networks smelled blood as O2, Vodafone and then EE all refused to renew contracts with Phones 4u, leaving it with no product to sell. The retailer was “forced” into administration according to chief executive David Kassler, but with the financial position it was in, Phones 4u had perilously little space for manoeuvre.

John Caudwell, who founded Phones 4u with his brother Brian in 1987, said the company had suffered an “unprecedented assassination” from “ruthless” mobile phone companies. He claimed that mobile phone companies colluded to kick Phones 4u off the high street in an attempt to reduce competition. He added that there was no evidence to back up his suspicions and the mobile phone networks have denied any kind of collusion.

He may well be right, but he’s certainly not entirely blameless. Caudwell sold his business empire to Providence Equity Partners for £1.46bn in 2006, netting £1.2bn in profit in the process, arguably the first step toward the predicament it found itself in.

What’s certain is that EE, O2, Vodafone and Three do all stand to benefit from the demise of Phones 4u. Administrators PwC have managed to save 198 Phones 4u shops by flogging them at cut price rates to none other than EE and Vodafone. EE will take on 58 stores with Vodafone snapping up 140. Dixons Carphone will also hire the 800 people who worked in Phones 4u concessions at Currys and PC World.

PwC inevitably turned to mobile phone networks and rival companies to sell off Phones 4u’s assets, but the conclusion to this debacle leaves a bitter taste in the mouth. The facts are clear: mobile phone networks knew Phones 4u was vulnerable, they knew it depended on their contracts and when it collapsed they were perfectly placed to negotiate with administrators.

With Phones 4u gone there is now less competition and that’s bad news if you’re looking to buy a phone. EE, O2, Vodafone and Three are closer than ever to a monopoly on contract sales, letting them charge more for minutes, texts, data and handsets. Phones 4u was a success because people could walk into a store and compare mobile phone deals from different networks side by side and pick the best one. Finding the best deal and getting better value for money is now a little more difficult.