Carphone Warehouse will put its European and U.S. retail business, which operates from more than 2,400 stores, into the joint venture, in return for a cash payment of GBP1.1 billion from Best Buy.

The two companies said the deal aims to accelerate the development of Carphone Warehouse's retail business and to introduce Best Buy stores across Europe.

Carphone Warehouse is Europe's largest independent mobile-phone retailer by sales, while Best Buy is the largest electronics retailer in the U.S.

The pair already have a partnership whereby Carphone Warehouse operates out of Best Buy stores in the U.S.

Carphone Warehouse said it will use the proceeds of the deal to repay existing debt, invest in broadband customer growth and infrastructure and to invest in new areas of growth. Carphone Warehouse Chief Financial Officer Roger Taylor said the deal will be 10% to 15% earnings dilutive initially but despite the short-term hit to earnings will deliver long-term value for shareholders.

Analysts said the deal was a positive move which will reduce debt and free up capital to invest in the telecoms business. Landsbanki analyst Dan Gardiner said that based on earnings dilution of 10% to 15%, Carphone Warehouse's shares trade at 14 times estimated 2009 earnings which "still represents a significant premium to both the general retail and telecoms sector."

At 0718 GMT, Carphone Warehouse was one of the largest percentage fallers on the FTSE 100, trading down 9 pence, or 3%, at 291 pence.

Taylor will be chief executive of the new company and Bob Willett, chief executive of Best Buy International will be chairman.

Neither Willett or Taylor would comment on whether Best Buy would consider a bid for the whole of Carphone Warehouse, but Willett said the partnership was the main focus and "we are not thinking about anything else."

The joint venture expects to open its first new stores in the U.K. in 2009 before expanding elsewhere in Europe. Larger stores, such as those on retail parks, will be branded Best Buy while smaller high street stores will continue to trade under the Carphone Warehouse brand.

The deal is subject to shareholder approval and an extraordinary general meeting is scheduled to take place by early August.

Carphone Warehouse will continue to own 100% of its fixed line telecoms business in the U.K. and CFO Taylor said it is still considering a bid for Italian broadband operator Tiscali SpA (TIS.MI). Tiscali put itself up for sale last month and has attracted interest from several telecoms companies including BT Group (BT) and Telecom Italia SpA (TI) as well as Carphone Warehouse.

Taylor said, "we will put our toes into the process as we imagine everyone else will do in the first round," but said the sale process was still at a very early stage.