Dixons takes Russian plunge with £1bn plan to buy electrical retailer

Dixons joined the elite club of retailers prepared to brave the Russian market yesterday when it unveiled plans to acquire the country's biggest electrical retailer for $1.9bn (£1bn).

Dixons joined the elite club of retailers prepared to brave the Russian market yesterday when it unveiled plans to acquire the country's biggest electrical retailer for $1.9bn (£1bn).

Rather than rush headlong into one of the world's most notoriously unpredictable economies, Dixons has taken an option to buy an initial 10 per cent of Eldorado for $190m by 2008. It will then have until 2011 to take full control of the Russian group - if it wishes.

The City welcomed Dixons' cautious approach, although shares in the group slipped half a penny to 148.5p in a falling market. Analysts said Russia was a logical next step for Dixons, which already has interests in 11 countries outside the UK, including Hungary and the Czech Republic.

One retail analyst said: "Russia is quite imaginative. Most people would have gone to Poland next. Plus it's no risk because there is not even any obligation for the deal to go ahead."

Dixons has fixed the eventual price it will pay for Eldorado, which is Russia's biggest electrical retailer, regardless of how quickly the company grows. In the 10 years since it was founded, Eldorado, which also has operations in Ukraine, has amassed a 22 per cent market share in Russia. Dixons has been eyeing the chain for the past two years.

John Clare, the chief executive of Dixons, said: "This is a great opportunity and is consistent with our growth strategy. Russia is a market with enormous potential and Eldorado is the ideal strategic partner." He said the deal would give Dixons time to get to know Eldorado before it had to hand over any cash.

Dixons has promised to second a handful of senior managers, in roles spanning finance, logistics and buying, to its Russian partner. It said both groups would benefit from enhanced sourcing and buying opportunities. "The agreement gives Dixons the option to bring a fast-growing and profitable business into the group and lead the market in Russia and Ukraine," it said.

Should Dixons decide not to take up its option to buy a 10 per cent stake it will not be penalised, a company spokesman said. "This gives us a low-risk option of expanding into a country while acknowledging there is a degree of risk and regulatory uncertainty in Russia," he added.

There is barely a handful of foreign retailers bold enough to take on Russia with anything other than franchise operations. Even Tesco, which announced plans this week to almost double its rate of expansion abroad, prefers the relative security of China. Kingfisher is planning to invest £50m over the next two to three years in Russia, opening its first store under its Castorama brand next year in St Petersburg. Monsoon, the fashion retailer, is planning to open company-owned stores in Russia. Although most luxury goods retailers, including Burberry, have outlets in Russia, they stick with franchisee partners to minimise the risk.

Of the foreign retailers, only the Swedish home furnishings group Ikea, the French hypermarket group Auchan and Germany's Metro cash-and-carry have taken the plunge into Russia. But there have recently been whispers that Wal-Mart is sizing up the market. Eldorado, which is privately owned, has 610 stores across Russia and Ukraine, half of which are operated by franchisees. The group had sales of $2.47bn last year, 83 per cent more than in 2003. Analysts estimated it made about £60m in profits.

Igor Yakovlev, Eldorado's founder and president, said: "We will benefit enormously by leveraging Dixons' pan-European experience, scale and best practices. [The] close co-operation will enable us to accelerate our ambitious growth plans and generate opportunities for both parties." Mr Yakovlev is Russia's 46th richest man, according to Forbes magazine.

Eastward ho!

BHS, which was forced to withdraw from Russia in 1999 because of financial losses, now operates two Moscow stores through a franchise arrangement. The latest, on Moscow's prestigious Old Arbat Street, opened last year.

Rolls-Royce joined a clutch of other luxury car makers and piled into the market in 2004 opening an exclusive showroom at No 1 Red Square next to the Kremlin.

Kingfisher, the owner of B&Q and Castorama do-it-yourself stores, is to open its first Russian store in St Petersburg in 2006. It has said it plans to invest $600m to open 50 stores in Russia in the next 10 years.

BP entered a joint venture with Russian oil company TNK in 2003 pumping almost £8bn into the project, the largest single foreign investment in Russia.

Burberry, the luxury goods group, headed by Rose Marie Bravo, opened two stores in Moscow in 2004 in prime locations.

Monsoon, the womenswear chain, announced plans last year to open a store in GUM, one of Moscow's most famous shopping arcades, near Red Square.

Andrew Osborn in Moscow