Carphone Warehouse seeks European deal with Vodafone

Carphone Warehouse has attempted to soothe fears about the future of its retail business by rebuilding bridges with Vodafone, Europe's largest mobile phone operator.

Vodafone's decision to sign an exclusive agreement to sell its contracts through Phones4U in the UK wiped almost 20 per cent off Carphone's share price in September and raised questions about the viability of independent mobile phone retailers. At that stage the two companies appeared to be at loggerheads.

Yet Carphone has revealed that it is in talks with Vodafone over a fresh pan-European agreement. Roger Taylor, Carphone's finance director, said the rapprochement comes after frank talks between Arun Sarin and Charles Dunstone, the chief executives of Vodafone and Carphone respectively.

He said that no deal has been signed but the two companies are exploring ways to address Vodafone's concerns by better positioning its products within Carphone's stores. He added that he wants to resume selling Vodafone contracts in the key UK market once the mobile phone company's exclusive relationship with Phones4U has lapsed.

"The impression is that our relationship has soured but we are better friends than enemies," he said.

Mr Taylor said that despite losing the right to sell Vodafone contracts in the UK, the company still expects to outperform last year's result over the key Christmas trading period. He said that pre-pay sales are dominant over Christmas and that a range of new handsets, including exclusive designs from Cath Kidston, will drive sales. Last year, Carphone benefited from an exclusive deal to sell pink-coloured Motorola Razr handsets.

Carphone is pinning its hopes on a mass migration of its broadband customers on to its own telecoms equipment to stem mounting losses in the internet market over the next year.

Carphone racked up a near £38m loss on its foray into the broadband market in the first half of the year. The loss offset a strong performance in its core retail division, resulting in a 62 per cent decline in pre-tax profits to £14.1m.

Mr Taylor said: "By midway through 2007, we will have 1 million customers unbundled. No one else will have that."

He reiterated that the company expects to make a profit of between £30m and £40m on its broadband product next year and is adding between 15,000 and 20,000 customers a week.

Carphone has about 2 million broadband customers after it acquired AOL's UK business in September. Yet only 60,000 have been migrated on to its equipment through a process called local loop unbundling. The rest of its customers are connected to BT's network through a wholesale arrangement that costs Carphone about £5 a month for each subscriber.

The company is about a third of the way through its plan to unbundle 1,000 local exchanges by May 2007. It transferred 40,000 of its customers on to those exchanges in October and Mr Taylor said that he expects that rate to double over the coming months.