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While Dixons Carphone [LON:DC] attracts takeover speculation in the UK, perhaps the most obvious transaction in electrical retail remains a potential combination between FNAC Darty [EPA:FNAC] and industry peer Ceconomy [ETR:CEC].

Soon after it executed a demerger transaction to split from food retailer and wholesaler Metro [ETR:B4B], Ceconomy acquired a 24.3% stake in FNAC in July. Subsequently, Ceconomy subsidiary MediaMarktSaturn signed an agreement with FNAC to create a Europe-wide purchasing alliance.

Takeover talk is a natural consequence of both moves and there are plenty of other reasons why Ceconomy might look to complete a full buyout.

First, Ceconomy has plenty of firepower and good reasons to use it.

Net debt to EBITDA runs at minus 0.3x, with net cash at EUR 197m, versus Dixons Carphone at 0.4x and FNAC at 0.3x. A net cash position can sometimes make sense, but at Ceconomy’s 40% tax rate it looks like a serious drag. Ceconomy’s lower investment grade Baa3 Moody’s credit rating indicates it can borrow at around 1%, falling to 0.6% after taxes.

Secondly, a full buyout could work even better for Ceconomy’s shareholders because of potential tax implications. Ceconomy’s current 40% target tax rate compares to FNAC’s theoretical rate of 33%, and a 2017 effective rate of 28%.

Raising cheap debt in Germany, offset against a high tax rate, while harvesting earnings from lower tax jurisdictions elsewhere, means there’s plenty of financial rationale for a transaction even before operational and strategic options are explored.

Combining the two companies at current market prices would see the pro-forma entity leveraged around 1.9x, trailing 12 month EBITDA, pre-synergies.

FNAC trades at a trailing-12-month price-to-earnings ratio of 17.4x versus Ceconomy on 19.1x and Dixons Carphone at 7.5x. Management guidance and company-compiled consensus numbers from Ceconomy and Dixons implies the two trade at 11.0x and 9.6x on a year-ahead basis. FNAC has not provided detailed forward guidance.

Key risks include competition question marks that a potential combination of the two businesses could prompt. Overlaps appear to be in the Benelux region, where FNAC operates 147 stores and Ceconomy has 74, and Portugal and Spain, where both have a sizeable presence at 52 stores and 88 stores, respectively. A 2016 Metro presentation showed Portugal and Switzerland as the most consolidated markets in electrical retail. Market share among the five top players in most of the relevant markets is below 50%, the document shows.

Ceconomy said last week it is considering a deal to buy 15% of M.Video [MCX:MVID], at a cost of around EUR 150m, alongside a possible capital hike of 10% of its share capital. If executed in that way, it would leave plenty of balance sheet headroom to pursue a deal with FNAC.

A combination between the two peers appears to work wonderfully in theory. Whether it also does so in practice remains to be seen.