Bloomberg News

Deutsche Telekom’s Greek Deal May Trigger Labor Cost Talks

June 07, 2011

(Updates with closing share prices.)

June 7 (Bloomberg) -- Deutsche Telekom AG Chief Executive Officer Rene Obermann, who persuaded workers in Germany to accept lower pay in 2007, may have to do the same in Greece to turn around the unit with the steepest revenue decline.

The Greek government exercised an option yesterday to sell 10 percent of Hellenic Telecommunications Organization SA to Deutsche Telekom for 400 million euros ($583 million). The Bonn- based company may now push for changes in Greek labor laws and incentives for broadband and wireless investments as it weighs taking on more shares, said a person familiar with the matter.

“Having such a conversation could absolutely help them improve their operating environment,” said Guy Peddy, a London- based analyst at Macquarie Securities, who rates Deutsche Telekom “outperform.” “It’s very difficult to reduce the headcount, and OTE has tried that in the past and failed.”

Prime Minister George Papandreou’s government, shut out from financial markets and faced with the biggest debt load in the euro’s history, aims to sell 50 billion euros in state assets to secure additional bailout payments. In the third year of Greece’s recession, fixed-line customers and mobile-phone subscribers are fleeing Hellenic Telecommunications, also known as OTE, leading to a 13 percent drop in first-quarter sales.

Direct Stake

Reaching an agreement with authorities would help OTE address productivity shortfalls and improve profitability, said the person, who asked not to be identified because talks have not been initiated yet. Deutsche Telekom will own 40 percent of Athens-based OTE plus one vote after the completion of yesterday’s transaction.

Andreas Leigers, a Deutsche Telekom spokesman, declined to comment. A spokeswoman for the Greek Finance Ministry didn’t return a call seeking comment.

OTE dropped 43 cents, or 6.2 percent, to 6.46 euros at the close of trading in Athens for its biggest decline in a year. Deutsche Telekom added 0.9 percent to 10.09 euros in Frankfurt. The 21-company Bloomberg Europe Telecommunication Services Index was up 0.1 percent.

Obermann, 48, is focusing on Deutsche Telekom’s domestic and European business after agreeing to sell the T-Mobile USA division to AT&T Inc. in March for $39 billion, a deal that is pending regulatory approval as the U.S. Federal Communications Commission and Justice Department investigate competitors’ concerns that the transaction may reduce competition.

Remaining Stake

Greece will be left with 10 percent of OTE, including a 4 percent stake held by the company’s pension fund. The country’s Finance Ministry said May 23 it may sell the 6 percent it directly holds by the end of this month. Deutsche Telekom, which fully consolidates OTE and determines its CEO, has a right of first refusal on that stake.

Deutsche Telekom has now spent 4.2 billion euros on OTE shares since 2008, seeking to profit from growth in the Greek company’s Romanian, Bulgarian and Albanian markets. Obermann said June 1 acquiring a further stake would depend on the conditions for such a transaction.

OTE’s 10,900 fixed-line workers in Greece are less productive on average than their counterparts at Deutsche Telekom. OTE’s land-line employees on average generated revenue of 198,607 euros each last year, 20 percent less than the 246,923 euros for the Germany company’s fixed-line unit, the annual reports showed. Deutsche Telekom’s German fixed-line workforce reached 73,614 last year.

Personnel Costs

For every dollar of fixed-line sales, OTE spent 37 cents on personnel, CEO Michael Tsamaz said last month. Almost 80 percent of OTE’s fixed-line staff are treated as civil servants, and OTE has been prevented from trimming payroll costs further in part due to laws that protect employees from being fired, dating back to when the company was fully owned by the Greek state.

“Unless we manage to find a way to reduce the personnel costs, the cost cutting will never be enough and we’ll continuously over the years be running after a moving target,” Tsamaz said May 6.

Four years ago, Deutsche Telekom reached a deal with a German union to move 50,000 service employees to jobs with lower salaries, helping Obermann see through a 900 million-euro cost cutting program. He must win over unions and politicians in Greece too to reorganize OTE’s workforce, which totals 32,000 across the countries where the company operates.

Cutting Benefits

CEO Tsamaz has brought in new measures to bring down costs. The company on Feb. 28 announced the introduction of a 40-hour working week and slashed managers’ monthly allowances by 15 percent to save about 32 million euros. It also cut non- essential overtime, company-car benefits and a bus service for employees travelling to the Athens headquarters.

OTE sells fixed-line connections, and also mobile services through its Cosmote unit. In the first quarter, the Greek operator lost the most revenue from a year earlier among all of Deutsche Telekom’s national units as phone-line users and mobile customers defected amid the country’s economic slump.

“It’s not that different from what haunted Deutsche Telekom in Germany,” said Heinz Steffen, an analyst at Fairesearch GmbH in Kronberg, Germany, who has a “reduce” rating on Deutsche Telekom. “It takes forever to bring salaries down to a market level and reduce pension obligations. They really have taken another restructuring task onboard.”

--With assistance from Maria Petrakis in Athens. Editors: Kenneth Wong, Heather Harris

To contact the reporter on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong in Berlin at kwong11@bloomberg.net


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