Deutsche Telekom faces lean year in 2003

The German tech group's belt-tightening measures are likely to dominate asit seeks to reduce a €64 billion debt mountain

The German tech group's belt-tightening measures are likely to dominate asit seeks to reduce a €64 billion debt mountain

Investment for masochists: that's how one German shareholder described his brush with Deutsche Telekom at this year's annual general meeting.

Without doubt it has been a painful 12 months for Europe's largest telecommunications company: it ousted its chief executive after a messy power struggle and announced one of the largest-ever losses in European corporate history.

Its new chief executive has announced a round of belt-tightening to turn the company around but the immediate future looks bleak for shareholders, including the 4,500 brave Irish souls who bought into the Deutsche Telekom dream in 1996.

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The flotation of Telekom created a shareholder culture in Germany overnight after three million people bought the so-called "people's share". The shares reached a dizzying high during the technology boom two years ago, but came crashing to earth after the technology bubble burst. The shares lost 90 per cent of their value and, at one point this year, dropped below their issue price.

That was the beginning of the end for Dr Ron Sommer, Telekom's smooth-talking CEO. He antagonised shareholders by calling Telekom shares "a great bargain" and was booed and heckled at the AGM in May.

One small shareholders said he was furious that the supposedly stable "people's share" had become "a high-risk gamble stock".

Dr Sommer had survived innumerable resignation calls in the past because he had the backing of Berlin, the largest Telekom shareholder with a 43 per cent stake.

But after the opposition turned the collapse of Telekom shares into an election issue, the government let it be known that it had withdrawn its support for Dr Sommer. It started a boardroom battle unprecedented in the normally civilised world of German business.

After weeks of speculation, Dr Sommer was thrown overboard - seen by many in Berlin as a sacrifice to appease the three million angry German voters who lost money on Telekom shares.

Dr Sommer was gone, but his legacy, a €67 billion mountain of debt, remained. The debt originated primarily from a string of costly purchases during the technology boom. The company was €8.48 billion out of pocket after a dramatic auction for a third-generation mobile phone licence. Meanwhile the acquisition of VoiceStream, the loss-making US mobile phone company, added €3.5 billion to the debt pile.

The company appointed Mr Kai-Uwe Ricke (41), the head of T-Mobile, as its new chief executive on the same day it announced a loss of €24.5 billion for the first nine months of this year, one of the biggest losses in European corporate history.

Mr Ricke's seat was barely warm when he made debt reduction his priority. The company hopes to slash around €12 billion off its €64 billion debt in 2003, half through disposal of non-core investments and the other half through cost-savings.

"We can only win back the trust of large and small shareholders alike through words not deeds," said Mr Stephan Broszio, spokesman for Deutsche Telekom. "Our debt-reduction target is very important to show we are serious." The company is making huge cuts in its advertising budget, stopping the proliferative use of outside consultants and has decided to not pay shareholder dividends for 2002.

The company also has unconfirmed plans to cut around 46,000 jobs from 2004, one-fifth of its workforce. But after those cuts, it is not clear where Telekom will find the money to eliminate the rest of its debt.

No one knows when the company's €8 billion investment in third-generation mobile phones will begin to pay off. Plans to launch the service next year could be postponed if, as many are beginning to fear, manufacturers are unable to deliver attractive handsets in time.

"We are not expecting an explosive start to the UMTS era," said Mr Broszio.

Telekom was never euphoric about UMTS, but it was obliged to get a licence to remain competitive. The company has spent €140 million this year alone building up the network, which it says will be ready to go into operation in 75 cities by the autumn.

Meanwhile the company's long-held hopes to raise cash through the spin-off of T-Mobile, its wireless division, have been put off indefinitely because of poor market values.

The company has also decided to hang on to VoiceStream, now known as T-Mobile USA.

"It's not for sale in the short term, but our ear is always open for possible medium- or long-term offers, such as the sale of a share of the company," said Mr Broszio. However he said the company was not prepared to dispose of the company to raise quick cash. "It's losing less money as time goes on and slowly becoming a valuable investment."

Organisations representing small shareholders in Germany are not yet convinced that Deutsche Telekom has turned a corner. They say the difficulty of finding a new CEO is proof of Telekom's dented image in Germany and abroad.

"After all those months of farcical searching, when everyone in German business said no, they finally picked a third-rate internal candidate," said Mr Markus Straub, spokesman for the Union of Small Shareholders. He fears that Mr Ricke is too much of a Telekom man and not the breath of fresh air the company needs to get back on track.

Despite Mr Ricke's mixed record, there are signs that Telekom is finally getting over its hangover from the days of the technology boom.

"Telekom had a reality check and is now moving on," said Mr Broszio of Telekom, though he admits the company will face a difficult market situation in 2003.

The company hopes to be able to react more quickly to the market with a new slimline board that should speed up decision-making and integrate more closely the company divisions.

Nevertheless 2003 is likely to be a year of hairshirts and watery gruel for Germany's telecommunications giant. The punch-drunk euphoria of the technology boom is a distant memory, as is Dr Ron Sommer, the man who lead the company's spending spree.

But the €64 billion bill is clocking up annual interest of at least €4 billion. "I think Telekom has finally realised the situation it is in," said Mr Straub of the SdK. "The question is, do they know how to get out of this situation and can they do it alone?"

Derek Scally

Derek Scally

Derek Scally is an Irish Times journalist based in Berlin