Shares in Carphone Warehouse were marked down after Phones4u was flushed out as a possible rival for the affections of electricals group Dixons.
Last month Carphone Warehouse and Dixons confirmed they were discussing a merger that would create a new FTSE 100 retailer with 2,900 stores. But Carphone's shares closed down nearly 5% after Sky News reported that Phones4u's private equity owner, BC Partners, had approached Dixons to discuss extending its existing tie-up with the owner of PC World and Curry's.
BC Partners' intervention came as Dixons and Carphone failed to agree merger terms before a 5pm Monday deadline. The Takeover Panel has given the companies a further eight weeks to formally announce the merger, which would create a store chain with sales approaching £12bn.
A merger of Carphone and Dixons would leave Phones4u in a difficult position as it has concessions in 160 Dixons stores and would be booted out if the deal went ahead.
Dixons, BC Partners and Carphone declined to comment. However, one insider said: "They [BC Partners] have been speaking about it [a merger]. There has been some interaction."
Another insider said there were "no current talks" suggesting Phones4u had been rebuffed.
Earlier on Monday, Dixons and Carphone released a statement to the stock market saying they needed more time to agree the terms of the deal. "Since the announcement of 24 February was made when discussions were at a very preliminary stage, both parties have agreed that they require more time to evaluate a potential merger of the two businesses," it said.
Carphone Warehouse was founded in 1989 by Sir Charles Dunstone, who still owns 23% of the company. Both retailers have weathered difficult trading conditions in UK retail, with Dixons recently reporting its second consecutive year of improved Christmas trading as it benefits from the demise of rival Comet. Carphone has 2,037 stores worldwide and annual sales of £3.7bn while Dixons has 947 stores and a turnover of £8.2bn.
Dixons, which sold its 300-strong mobile phone chain The Link to network operator O2 for £30m in 2006, is looking for new avenues of growth, with its chief executive, Seb James, keen to get back into the lucrative mobile market. However, the high street retailers still need to agree on the structure of the deal, with Dunstone said to be insistent it is a "merger of equals". If it succeeds the entrepreneur is expected to chair the enlarged group with James as chief executive. Carphone shares closed down 16.4p at 322.9p while Dixons finished the day unchanged at 49.67p.
BC Partners, which bought Phones4U for £700m in 2011, is actively looking for an exit. It has explored the possibility of floating the 600-store mobile phone retailer on the London stockmarket at a reputed £1bn valuation. The firm said it was expecting to float the retailer in the autumn. BC Partners successfully floated estate agency chain Foxtons for £649m, and the shares gained 20% in their first day's trading in September last year.
Phones4U was founded by entrepreneur John Caudwell, who sold the group to Providence Equity Partners and Doughty Hanson for £1.5bn in 2006. Caudwell, who has pledged to give away half his wealth when he dies, owns a five-storey mansion in Mayfair. The house, which once belonged to Prince Jefri Bolkiah, the playboy younger brother of the Sultan of Brunei, boasts a ballroom with elaborate panelled walls edged with 24-carat gold leaf.
Caudwell, who set up Caudwell Children, a charity for disabled children, told Hello! magazine last year: "The more I make in my lifetime, the more my children will have to give away. That is what drives me and it is very much a goal of mine to encourage people in my position to see what I have done and choose that path."