Deutsche Telekom's Sommer replaced by caretaker CEO

17 July 2002 -- Deutsche Telekom's CEO Ron Sommer has resigned. Caretaker CEO Helmut Sihler promises radical cost-cutting strategy to reduce debt.

17 July 2002 -- After mounting pressure from Deutsche Telekom's 20-strong supervisory board - made up of representatives of shareholders, unions and the German government, which owns 43% - Ron Sommer has resigned after seven years as CEO.

Deutsche Telekom is Europe's largest telecoms operator. But, after a two-year expansion strategy of costly acquisitions and investments in German 3G mobile phone licenses, it has Euro67.3bn of debt and its share price has dropped almost 90% (to a level below which three million Germans invested on its initial public offering in 1996). Deutsche Telekom lost Euro3.5bn last year - its first annual loss since partial privatisation - and Euro1.81bn in Q1/2002 alone.

At an extraordinary meeting of the supervisory board on Tuesday it appointed 72-year-old former board head Helmut Sihler as caretaker CEO for six months (enough time to give management stability up to September's elections). His main role is to look for a full-time successor while pursuing Sommer's plan to sell assets to reduce debt.

Deputy CEO (also for just six months) is management board member Gerd Tenzer, head of the technology and networks division. The government had proposed Tenzer as Sommer's replacement, but it needed to win the consent of trade unions (which hold 10 out of 20 supervisory board seats) for a two-thirds majority. Ado Wilhelm of the services union Verdi had said that "If there were to be a change, we'd like to see an internal solution".

The conservative CDU opposition has accused the Social Democratic Party government of political interference in undermining Sommer, but finance minister Hans Eichel said the government's role was confined to the actions of its two representatives on the board. "Consolidation of the company is now the focus of the next year," Eichel says.

Sihler promises a radical cost-cutting strategy, but is likely to pursue plans already drawn up by Sommer. Sommer had finally accepted parting with a majority of the loss-making Voicestream subsidiary - the number-three US cellular operator, which was bought for Euro34bn and has a market share of about 7% - if it was merged with a larger US rival. However, such strategic decisions may be deferred until a permanent CEO is appointed. Latest Voicestream results show an improvement, with 525,000 new subscribers and profits up 50% to Euro106m.

Also, German fixed-line business T-Com has stabilised, with Euro5bn profit in the first half of 2002. But the flotation of mobile subsidiary T-Mobile - expected to raise Euro10bn ? may not happen as planned. Other disposals include six cable TV companies worth Euro3bn-3.5bn and property disposals worth Euro3bn over two years, as well as Euro2.3bn from smaller assets.

But with key disposals temporarily shelved, time is running out for Deutsche Telekom to meet its Euro50bn debt target by end-2003. The group could face a de-rating if no significant transaction takes place in the near future or if it misses its 2002 targets of Euro15.9-16.9bn in pre-tax earnings and Euro500m-1bn in operating free cashflow. It could also struggle to meet interest payments, which could total Euro4.5bn-5.5bn in 2002. Despite this, Deutsche Telekom still says it should cut debt to Euro60bn by end-2002.

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