Deutsche Telekom to Oust Its CEO

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For Kai-Uwe Ricke, the embattled CEO of German telecommunications giant Deutsche Telekom AG, efforts to revive the company's sagging domestic business and boost the share price were just too little too late. Shareholders of Europe's biggest telecommunications company, which also owns the successful American wireless company T-Mobile, have lost confidence in management's ability to stop the dramatic decline in its domestic business, according to people familiar with the situation. One of those big shareholders is the U.S. private equity firm Blackstone Group, which has been exerting American-style, do-it-now pressure on one of Germany's iconic businesses. The supervisory board is expected to hold special meeting, possibly as early as Nov 19, to vote to replace Ricke and Walter Raizner, the management board member in charge of the company's struggling fixed-line business, sources familiar with the situation tell

A leading candidate to replace Ricke is Rene Obermann, the boyish CEO of T-Mobile, Telekom's fast-growing international mobile phone unit and the fourth-largest wireless carrier in the U.S. Obermann is the candidate preferred by the German government and labor representatives on the supervisory board. But there is some opposition to Obermann's appointment by investors and supervisory board members, who would rather see an outside executive with international experience.

Telekom's 20-member supervisory board, which appoints and oversees the executive management, was scheduled to meet on Dec. 5 to discuss the state of the company's business and whether to extend Ricke’s five-year contract, due to expire in November 2007. But after the company' s third-quarter financial report released this week showed that the slide in the company's domestic business is continuing unabated, investors became convinced that the only recourse is to change faces at the top as soon as possible. According to people familiar with the situation, the supervisory board could now meet as early as next Sunday. Telekom's largest investors, the German government with 33% and Blackstone Group, which holds 4.5%, both sit on the supervisory board and will push to remove Ricke and Raizner. The supervisory board contains an equal number of representatives from investors and labor. "The major investors and labor representatives have lost confidence in current management's ability to improve the situation," said one source familiar with the situation.

Deutsche Telekom and Blackstone declined to comment.

Liberalization of the European telecommunications industry in 1998 brought an onslaught of competition in local phone markets. Although Telekom is still the dominant carrier in Germany, competition is accelerating and management has been slow to fight back. In August, Ricke issued an unexpected profit warning and then announced plans to cut costs and improve customer service. But the erosion continued. On Thursday, Telekom reported a 20% drop in net profit in the third quarter to $2.48 billion, compared with $3.12 billion the year before. After adjustments for extraordinary income, Telekom's profit was down 34%.

Speaking to reporters on Thursday, Ricke noted that the company's shares gained some 25% in value since he announced his cost-cutting measures. But analysts and traders credit that rise to continued speculation of a management shake-up and potential takeover of the German phone giant. Lacking any good news on the company's business outlook after an analyst meeting on Thursday, Telekom's shares tumbled 2.45% on Friday after some analysts downgraded the stock.

It will take more than a change of management to woo Telekom's German customers back. But Ricke’s departure would be a welcome sign for the company's investors.