05 May 2009

Deutsche Telekom under pressure to exit UK

30 04 2009 - Deutsche Telekom is under pressure from its two main shareholders, the German government and Blackstone, the private equity group, to decide quickly whether to sell its ailing UK mobile telephone operations.

The company’s controlling investors were worried about the state of the underperforming T-Mobile UK, which is only the fourth-largest player in a viciously competitive market, people familiar with the supervisory board said.

These people said the issue of getting out of one of Telekom’s largest markets was first aired about six months ago, but falling asset valuations soon made Berlin and Blackstone more cautious about pursuing a sale option alone.

An alternative to a sale could be a merger or acquisition deal with a UK rival to gain market share, said one person familiar with the shareholders, “but they want a decision yesterday”. Berlin and Blackstone want “a quick decision [from executives] about fixing the UK”, the person said.

The government, which controls 32 per cent of Telekom, and Blackstone, with 4.5 per cent, were said to have grown more restive after the poor results of T-Mobile UK helped push Telekom into a profit warning 10 days ago.

One option would be to merge with 3, the fifth-largest player, owned by Hutchison Whampoa, which has long been seen as a possible – if expensive – fit. A sale of DT-Mobile UK would be an important strategic switch for DT. It would give up one of its biggest markets at the same moment as its biggest mobile phone business, T-Mobile US, also struggles to compete.

People familiar with the two shareholders said the possibility of getting out of the UK market was a marked contrast to their attitude to the US. Both shareholders firmly stood behind Telekom’s ambition to stay in that market, they said.

O2 and Vodafone, the UK market leaders, reported profit margins of 26.1 per cent and 25.4 per cent respectively in their last results, at the level of earnings before interest, tax, depreciation and amortisation. T-Mobile recorded an ebitda margin of 24.1 per cent in 2008.

René Obermann, Telekom chief executive, said in late April he would appoint new management to put the UK business back on an even keel, but he did not exclude any strategic options beyond that. Mr Obermann is expected to appoint Richard Moat as new head of T-Mobile UK, replacing Jim Hyde.


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