Deutsche Telekom's new CEO faces twin tests

By Harro Ten Wolde and Leila Abboud

FRANKFURT (Reuters) – When Deutsche Telekom’s new Chief Executive Tim Hoettges takes office on Wednesday, a revival of mergers and acquisitions in the sector and a dramatically changing competitive landscape in Germany will pose his biggest challenges.

Having negotiated key deals in the United States and Britain during his four-year tenure as finance chief and having previously turned around the German fixed-line business while under fire from cable rivals, the 51-year-old is no stranger to the territory.

Hoettges will draw on such experience to decide how Deutsche Telekom, Europe’s third-largest telco by sales, should navigate consolidation on both sides of the Atlantic and take on a rejuvenated Vodafone in Germany.

Born in Solingen, a city in the prosperous eastern state of North Rhine-Westphalia, Hoettges is said to be straightforward, traditional and intense, unlike his long-time friend and outgoing CEO Rene Obermann, who is known for his easy charm.

“Hoettges is not known for schmoozing corporate colleagues or politicians,” said another banker who worked for him.

“He handles such relations in a cool and businesslike way. He is not the kind of person who is buddies with politicians and the rich and beautiful of the world.”

Hoettges treads a more adversarial path.

“Unlike some CEOs, he wants to be contradicted,” said another banker who has worked with him. “He wants an intense discussion and will challenge you, too. He’s also like that in negotiations: clear goals, minimal compromises.”

While he immerses himself in the details, he never forgets the broad strategic lines, the banker added.

The piano-playing running enthusiast also has a less severe side than his angular physique and bald pate might suggest, say those who know him. Some recall the riverboat party to celebrate his 50th birthday, when Hoettges donned a wig and moustache to give guests a glimpse of what he looked like in his youth.

He and Obermann became close friends over the past decade as they climbed the ranks of Deutsche Telekom together, even becoming neighbours after building houses on adjacent plots.

DIFFERENT HAND

Bankers and analysts do not expect Hoettges to suddenly alter the strategy set by Obermann in recent years, which consisted of cleaning up overseas businesses including the money-losing T-Mobile US, while defending its leadership in Germany by investing heavily in the network.

Nevertheless, as telecoms acquisitions gather pace, Hoettges could soon be playing a very different hand to his predecessors’.

In Europe, U.S. telco AT&T has been scouting for acquisitions, and if it bids for Vodafone as some analysts and bankers say it could, Deutsche Telekom and other European groups would be forced to react against a formidable new player.

In the United States, third-placed mobile operator Sprint, which is backed by Japan’s Softbank, has been studying a bid for Deutsche Telekom’s T-Mobile US to bulk up.

That T-Mobile US is even of interest to Sprint and has been poaching customers from larger rivals in recent quarters can in part be credited to Hoettges, who was instrumental in negotiating deals and a turnaround for the unit.

It all began when AT&T’s $39 billion bid for T-Mobile in 2011 fell apart because of regulatory opposition. Fortunately, Hoettges and others had insisted on a big break-up fee if the deal with AT&T fell through, which included cash and mobile spectrum worth $6 billion.

The package, especially the spectrum, turned out to be particularly useful to T-Mobile, enabling its launch of superfast mobile broadband services known as 4G. “Tim knew the technology that the team was negotiating for,” said a banker.

The banker said T-Mobile was now well positioned in the United States in the event of further consolidation.

“Hoettges created a cookie jar in the U.S. which will provide cash in case of a disposal or a bargaining chip, however the consolidation trend goes,” the banker said.

HARDBALL

Gervais Pellissier, chief financial officer at Orange, dealt head to head with Hoettges in negotiations to merge their British mobile businesses in 2010.

“He is tough in negotiations but always tries to understand where the other person is coming from,” said Pellissier.

During a testy meeting over whether to kill the Orange and T-Mobile brands in Britain, Hoettges sensed that the two sides were at an impasse and suggested everyone take a break for a beer. “I think he knew everything was about to descend into a fight, so he cut it off. He called me a few hours later and we were able to make progress,” said Pellissier.

The future of that venture, now called EE, will be among the strategic decisions Hottges has to take. The owners have said they will consider floating a minority stake in the operator, Britain’s largest, valued at about 10 billion euros, though they have pushed back the final decision as EE won 4G customers in recent quarters.

Hoettges will also have to keep a close eye on the German market, which generates about half of group operating profit.

Vodafone, which disputes the top mobile spot with Deutsche Telekom, has bought Kabel Deutschland to boost its broadband offering, while third and fourth-placed mobile groups Telefonica Deutschland and KPN’s E-Plus are seeking to merge. Both deals could force operators to adopt new commercial strategies to win customers, and mobile prices have already come down in recent quarters.

Hoettges has shown he can play hard ball. As head of the German fixed business in 2007 he held out during a month-long strike over a plan to outsource some workers.

Backing down is not something he takes lightly.

One union official said Hoettges reluctantly agreed a deal to raise German wages in 2009 but was never entirely reconciled to the defeat.

“It still irritates him even today. He is very persistent.”

(Additional reporting by Arno Schuetze and Peter Maushagen; Editing by Will Waterman)

Deutsche Telekom's new CEO faces twin tests