Comment & Analysis

Carphone Warehouse (LSE: CPW.L - news) got a boost on Thursday when Vodafone (LSE: VOD.L - news) 's UK business said it would resume using the retailer for sales of handsets tied to monthly contracts on the mobile operator's network.

Carphone was rocked in October 2006 when Vodafone decided to stop using the retailer for deals with consumers involving monthly contracts.

The company's shares fell 14 per cent on the day, because of concerns that Carphone's business model had been badly damaged by the inability to sell handsets linked to all the leading mobile operators.

From July 7, Carphone will resume selling handsets tied to monthly contracts with Vodafone's network.

Analysts at Citi said Vodafone's return to Carphone could lift the company's earnings per share by 2 per cent.

Charles Dunstone, Carphone's chief executive, said: "We have always set out our stall to offer the widest possible choice of handsets, networks and tariffs and our new agreement with Vodafone will bring exciting new products and services to our stores."

Vodafone's change of heart on Carphone follows almost three years in which it has failed to regain market leadership in the UK.

O2 overtook Vodafone to become the largest mobile operator by customer number in 2006.

The Citi analysts said Vodafone's decision to stop using Carphone for sales of handsets tied to monthly contracts had done the operator "no favours".

They added that Vodafone needed Carphone to help it increase its customer base, although they also highlighted how the move would increase the operator's costs.

Mobile operators using Carphone have to pay commissions to the retailer when it signs up customers to their networks.

When Vodafone dropped Carphone for sales of handsets tied to monthly contracts in 2006, it signed an exclusive arrangement with Phones4U, Mr Dunstone's main high street rival.

Vodafone will continue its relationship with Phones4U, although the exclusive arrangement will end on July 7.

On Thursday, Carphone's shares were down more than 1 per cent in morning trading, at 157.5p.

Last year, Carphone put its mobile phone shops into a joint venture with Best Buy (NYSE: BBY - news) , the leading US consumer electronics retailer.