Business Watch: EE cuts are deep – but it could be just the start

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 Dominic White reckons there could be more job cuts at Everything Everywhere as the joint venture struggles to deliver on its promised cost savings

The night of the long knives is over at Everything Everywhere (EE) but who’s to say that more cuts may not be on the cards?

Incoming chief executive Olaf Swantee astonished employees by more than halving the senior executive team through redundancies and demotions, on his first day in the role.

Some of the team may have seen the writing on the wall when their former boss Tom Alexander (pictured) left the building in July, just a year after the business was formed through the merger of Orange and T-Mobile’s UK arms.

The sad truth is that the merger has thus far failed to deliver its promised cost savings and has provided more proof – if it was needed – that telecommunications joint ventures rarely prosper.

Alexander, the former Virgin Mobile boss, was the eternal optimist. He arrived at Orange a few years back with a grand plan to inject the fizz back into a brand that had gone decidedly flat, using tricks straight out of the Richard Branson cookbook.

But it quickly became apparent to the company’s parent France Telecom that, despite Alexander’s best efforts, Europe’s mobile market was simply too competitive to sustain five players.

So it pooled UK mobile assets with Deutsche Telekom, owner of the sub-scale T-Mobile, and gave the venture the rather silly name Everything Everywhere.

The parents tasked Alexander with delivering a whopping £3.5 billion in costs savings. But only a fraction of that has been achieved so far. Meanwhile, EE’s mobile service revenues have gone backwards despite the explosion in data.

It’s done a decent job of recruiting customers to high-end smartphones but, even with the company’s sensible move to unwind unprofitable prepay punters, EE’s performance has clearly irked the parent companies.

Alexander appears to have been stuck in the middle of two high-maintenance shareholders: an unenviable position that tested even his legendary chutzpah.

So the powers that be have flown Swantee into the UK from the France Telecom mother-ship. He’s a very different character from the quintessentially English Alexander.

The German-born executive boasted an impressive background in personal computers, prior to becoming executive vice-president of Orange’s European operations in 2007.

He has quickly shown his determination to shake things up by removing Richard Moat, the executive behind the EE calculator.

Moat had won praise for slashing costs at T-Mobile UK prior to the merger with Orange UK and was seen by many as a potential successor to Alexander.

Neal Milsom will take Moat’s previous role of chief financial officer, in a much tighter management team that Swantee – who has also drafted in some new execs – hopes will reduce bureaucracy.

Swantee says Britain is the most competitive mobile market in the world, but has steadfastly stuck to the company’s targets.

These include being the biggest network operator by revenue and boosting margins from their current lowly position. He also wants to double data revenues in just two years.

And his review of the management structure is continuing, so one can expect more cuts to follow the 1,200 EE has made since it was formed.

Despite the 50-50 nature of the joint venture, the ‘merger’ increasingly looks like a takeover by Orange, which boasts all the top management positions under Swantee.

He has a heck of a job on his hands: and there may come a point where the company has to reconsider its strategy of maintaining both the Orange and T-Mobile brands and operating them in parallel.

US lawsuits
Meanwhile, Deutsche Telekom’s efforts to get out of the (slightly less competitive) US market are backfiring spectacularly, news which could ultimately have repercussions for EE.

The US Justice Department has filed a lawsuit to block Deutsche’s planned £24 billion sale of T-Mobile USA to AT&T deal, because of concerns that the removal of another network operator would reduce competition in the country.

AT&T is scrapping to save the takeover, which would make it the biggest player in the market – overtaking Verizon Wireless, the joint venture which is 45 per cent owned by Vodafone and 55 per cent owned by Verizon Wireless.

Investors in Deutsche Telekom will be hoping the deal can squeeze through somehow, because analysts warn that T-Mobile USA is too small to thrive against the big boys and might have to go downmarket if it remains single.

The number crunchers reckon there is now only 20 per cent chance of the deal going through, versus as much as 75 per cent previously, according
to Reuters.

Many of these stockbroking firms have also cut their price targets on Deutsche Telekom shares in the wake of the Justice Department shock, and are questioning the company’s ability to deliver on its planned multi-billion-Euro share buyback.

As Deutsche Telekom shares were tumbling eight per cent on the day of the news, analysts at Bernstein Research told their clients in a note: “We think the deal is all but dead in the water, meaning an increase in near term competition in the US wireless market, as DT must go back into the fray, and a potentially protracted court battle.”

Commerzbank warned that even if the deal goes though, the US government would be likely to impose costly remedies. “The DOJ’s lawsuit … is a major setback. Precedents suggest the deal isn’t off and may still be settled. However, delay now looks likely and chances are high that DT would have to share necessary remedies,” analyst Heike Pauls wrote.

Spectrum delay
Back home, Three’s hopes of an early auction of 4G spectrum have been dashed after Ofcom warned that the process could be delayed as it battles to overcome legal and technical niggles.

The watchdog says that its already-delayed plans for an auction before June of next year now look “ambitious”. That would put the UK even further behind the US, Japan and Germany, which have already sold off their 4G licences.

Three UK needs the spectrum more than its bigger rivals and David Dyson, its new chief executive, will not be delighted at the latest developments.

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