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. Last Updated: 07/27/2016

U.K. Store Ditches its Plans for Russia

MTEldorado said in a statement that DSG's decision would not affect its plans.
British retail giant DSG on Wednesday said it was pulling out of a deal to buy electronics retailer Eldorado for $1.9 billion and had decided not to enter the booming Russian market, citing an uncongenial investment climate.

DSG, formerly known as Dixon Group, inked a deal two years ago that gave it the option to buy Eldorado before 2011, conditional on paying $190 million for a 10 percent stake in the firm before the end of 2008.

"We have done comprehensive due diligence covering a host of things including looking at other companies in Russia in the retail sector and beyond. "We have looked at the general environment," DSG chief executive John Clare told reporters in a conference call Wednesday.

"Overall, after a very comprehensive review, the board has concluded it would not be in the interests of shareholders to pursue the option."

Clare's remarks appeared to echo sentiments expressed earlier this month by Tony Blair, the outgoing British prime minister, who warned that European companies could minimize their investments if Russia did not have "certain shared principles and shared values" with Europe.

Instead of going into Russia, DSG said it would now return $199 million to investors through a share buyback program within the next 12 months.

A DSG spokesman, who asked to remain anonymous, said by telephone late Wednesday that the decision was due to a combination of factors, including Russia's business climate, and "some company-specific issues."

"The decision has no direct bearing to Tony Blair's warning last month," he said. "We will re-evaluate our decision to go into the Russian market in the future if circumstances change."

Eldorado spokeswoman Nadezhda Mikheyeva said in a terse statement that DSG's decision "would in no way impact Eldorado's strategy."

"We were and will continue to remain leaders in the Russian rankings, and our daily results bear that out," the statement said.

Blair's comments about investing in Russia came on the eve of the Group of Eight Summit in Germany, where Western leaders and President Vladimir Putin clashed on a range of issues.

"We want good relations with Russia, but that can be achieved only on the basis that there are certain shared principles and shared values," Blair told the British parliament on June 6. "If there are not, ... [the] consequence is that people in Europe will want to minimize the business that they do with Russia if that happens."

At a Moscow investment conference this week, Russian business leaders also criticized a thicket of regulations and bureaucracy as hindering the country's retail sector.

Yevgeny Chichvarkin, CEO of cellphone chain Evroset, said Tuesday that the number of companies in the consumer electronics sector holding initial public offerings or otherwise raising funds for development was low due to excessive regulation by government agencies.

Reliable financial information about Eldorado is hard to come by, analysts said.

"Eldorado is not a public company, therefore the level of openness in the company leaves much to be desired," said Olga Samarets, a consumer analyst with Prospect Investment Company.

Wednesday's announcement by DSG also came on the heels of disappointing results by DSG, particularly in continental Europe, which accounts for 40 percent of group sales.

The retailer has been one of the worst performers in the FTSE 100 over the last year, with DSG shares having fallen 13 percent.

When Clare steps down as CEO in September, his successor John Browett will inherit a business facing fierce competition from supermarkets and online retailers.

DSG, which owns Currys, formerly known as Dixons, and PC World, operates in 27 countries and employs more than 40,000 people in 1,200 stores and online stores.

DSG incurred costs of about ?170 million ($339 million) this year, due to writing down its assets in Italy, closing 11 French stores and reorganizing its British and Italian distribution networks, Bloomberg reported.

Shares of DSG fell as much as 6.9 pence, or 4.1 percent, to 163.6 pence in London and were trading at 167 pence as of 8:23 a.m. local time. Citigroup cut its recommendation to "hold'' from "buy."

The stock has declined 14 percent this year, cutting DSG's market value to about ?3 billion ($6 billion).

With Eldorado now worth more than $5 billion, analysts said the deal would have hit the rocks sooner or later.

"Rumors have been floating around since last year that Eldorado has decided against selling part of its business to Dixons," Samarets said. "Even in the absence of official confirmation, it seems like the decision to tear up the agreement was mutual."

Samarets said Eldorado was now fully able to "go it alone" and pursue its expansion strategy without DSG.

Eldorado was named the country's largest retail business and eighth-largest private corporation, according to the latest ranking by Forbes Russia magazine. Its turnover for 2006 was $4.2 billion.