Ovum Comment: T-Systems looks for a strategic partner

As part of Deutsche Telekom group, T-Systems last week presented its full-year 2006 results. Revenues were down 1.8% to €12.6 billion, EBIT (adjusted) was down 57.4% to €298 million with an EBIT margin of 2.4%, compared to 5.4% in 2005. EBITDA (adjusted) was down 22.4% at €1.23 billion, which saw a decline in its EBITDA margin from 12.3% in 2005 to 9.7% in 2006. Headcount increased by 7.6% to 55,687. Orders were up 3.8% at €14.1bn.

Ovum's Katharina Grimme comments:

T-Systems continues to suffer in its home market. Domestic revenues declined by 4.9% to €10.5 billion. Non-German revenues grew 18.2% to €2.1 billion but this is still insufficient to compensate for the domestic difficulties, notably its continuing heavy reliance on captive revenues (which account for 28% of revenues), and the large business in traditional telecoms areas (legacy voice and data). It also suffers from overcapacities (especially in Germany) and is underscale in low-cost locations, such as India or Eastern Europe.

In order to accelerate in its international growth and footprint, the company announced that it is looking for one or more strategic partners that would help to drive internationalisation. CEO Lothar Pauly did no specify what such a partnership would look like but excluded a financial investor as sole partner, and a sell-off of T-Systems.

We are skeptical as to the viability of this path. Strategic partnerships (or mergers) between large companies have proven very difficult in the past (see Capgemini/Ernst&Young, HP/Compaq or indeed T-Systems/debis). The question also arises over what value T-Systems can bring to the table. With its internal difficulties, it will be seen as a potential risk by any partner.

This announcement will clearly fuel all kinds of speculations - and may distract management attention from much-needed restructuring and efficiency improvement tasks. We believe it will be difficult to find a partner before it has tackled its in-house problems. SBS is a good example here: it explored the partnership option but found that it was unattractive and had to solve its problems itself. The specific situation of T-Systems (i.e. partly state-owned, with many civil servants, headquartered in a market with rigid labour laws) makes it even harder.

Katharina Grimme is the Director of Ovum's German office based in Cologne.

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