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Deutsche Telekom CEO Succession Signals Shift to Cost Cut

Deutsche Telekom AG (DTE)’s plan to hand the chief executive officer’s job to its finance director suggests the future of Europe’s telecommunications industry may hinge more on wringing out cost savings than on innovation.

Rene Obermann will step down from Germany’s largest carrier at the end of 2013 and be succeeded by Chief Financial Officer Timotheus Hoettges. Explaining the decision to the supervisory board yesterday, 49-year-old Obermann expressed frustration with efforts to persuade regulators to rethink rules that govern a shrinking industry, said a person familiar with the matter, declining to be named because the meeting was private.

Deutsche Telekom and European peers such as France Telecom SA (FTE) have been hurt by authorities slashing the fees they can demand for calls terminated on their networks. The most recent disagreement, with Germany’s network regulator, centers on the Bonn-based carrier’s push to win the rights to offer faster Internet services on existing copper wires -- a move that would help reduce spending on more expensive fiber-optics connections.

“Under Obermann’s leadership the company hasn’t really been able to reinvent itself within an industry that is performing very poorly,” said Francisco Salvador, a Madrid- based strategist at FGA/MG Valores. “It seems that innovation ideas weren’t the solution and now it’s time to focus on seeking more efficiencies.”

Cost Cutter

Hoettges, 50, will assume the additional role of deputy CEO in January before fully taking over from Obermann in 2014. Under Hoettges, Deutsche Telekom reached a three-year 4.2 billion-euro ($5.6 billion) cost-cut target ahead of schedule. He then set out a year ago a new goal of 1 billion euros in savings by 2015 through the merger of the internal computing and communications systems into a T-Systems unit.

Hoettges also wants to reduce some of the 12,000 staff in Germany who perform internal control functions such as measuring business processes, a person familiar with the matter said this month.

The CFO, who has been with Deutsche Telekom since 2000, was also credited for halting a slide in market share for the Internet business as head of the German fixed-line division. He became CFO in March 2009 and was involved in the setting up of a U.K. wireless venture with France Telecom, resolving a shareholders’ dispute over its Polish unit, and more recently, in negotiating the sale of T-Mobile USA to AT&T Inc. (T) -- which was opposed by regulators -- and then the October merger agreement with MetroPCS Communications Inc. (PCS)

Dutch Auction

In Europe, a three-year debt crisis has left Deutsche Telekom struggling to return revenue to growth and this month forced the carrier to follow peers including Telefonica SA (TEF) and France Telecom and cut its dividend.

Telecommunications stocks are the worst-performing industry group in the Stoxx Europe 600 Index this year. Phone companies have to spend billions of dollars to upgrade networks while regulators in the region are making it more difficult to make money from users of smartphones and Internet services.

Last week’s Dutch auction of wireless frequencies, in which a Deutsche Telekom unit took part, raised a greater-than- expected sum of 3.8 billion euros, indicating that the building of faster networks may be more expensive. The excessive costs caused the shares of Royal KPN NV, the Netherlands’ former phone monopoly, to drop the most in 11 years.

Deutsche Telekom gained 0.5 percent to close at 8.63 euros in Frankfurt yesterday after the succession announcement. It has lost 2.7 percent this year and fallen about a third since Obermann took over from Kai-Uwe Ricke in November 2006. The carrier, whose biggest shareholder is the German government with a 32 percent stake, has a market value of 37.3 billion euros.

‘Little Time’

“This company is highly influenced by regulation, by political things and so forth,” Obermann said on a conference call yesterday. “There’s little time for me, personally too little time to really deep dive into operational topics and I’d like to go back to the basics, to the machine room if you want.”

By the time Obermann steps down, he will have been with Deutsche Telekom for 16 years, including seven years at the helm. He joined Deutsche Telekom in 1998 and became a board member as well as head of T-Mobile International in 2002. While he built T-Mobile USA into Deutsche Telekom’s fastest-growing unit in the early years by offering e-mail devices such as the BlackBerry, the unit is now struggling to halt customer losses to AT&T and Verizon Wireless.

T-Mobile USA wants to return to growth by 2015, a challenge which will mean outselling Sprint Nextel Corp. (S) and nabbing customers from market leaders Verizon Wireless and AT&T.

ABC Telecom

At home, Deutsche Telekom is trying to defend its fixed- line market share against cable providers including Liberty Global Inc. (LBTYA)’s Unitymedia KabelBW. Obermann and Hoettges pledged this month, at an investor conference in Bonn, to return Deutsche Telekom to sales and profit growth by the end of 2014. That plan comes at the cost of 30 billion euros of network spending over the next three years.

Obermann’s career began when he co-founded ABC Telekom, a retailer of answering and fax machines, as a 23-year-old student at the University of Muenster in Germany. He ran the company from his apartment and later rented a 60-square-meter office with a double garage. At the time, ABC had several retail outlets and about 20 franchise retailers.

Hong Kong billionaire Li Ka-Shing’s Hutchison Whampoa (13) Ltd. bought ABC in 1991, after the company had grown to 20 million deutsche marks ($13 million) in annual revenue and 60 employees.

When Obermann took over as Deutsche Telekom chief in 2006 at age 43, he was the youngest among the 30 CEOs of companies on Germany’s benchmark DAX Index. His total compensation last year was 3.27 million euros, data compiled by Bloomberg showed.

As CEO, Obermann has targeted new businesses such as payments by phone, telemedicine and websites to download games and music. Hoettges said yesterday he would have some catching- up to do.

“I admire Mr. Obermann’s charm as well as his intuition when it comes to new business ideas,” he said. “I really have to familiarize myself more with the topic of innovation management.”

To contact the reporters on this story: Cornelius Rahn in Berlin at crahn2@bloomberg.net; Manuel Baigorri in Madrid at mbaigorri@bloomberg.net

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

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