Telefonica Picks KPN’s Price-Cutting Dirks to Lead German Push

Jul 03, 2014 6:15 am ET

July 3 (Bloomberg) -- By naming Thorsten Dirks to lead its enlarged German business, Telefonica SA is putting the country’s largest mobile-phone company by customers in the hands of a maverick known for discounts.

Dirks, the 51-year-old chief executive officer of Royal KPN NV’s E-Plus unit that Telefonica is buying, has undercut peers Deutsche Telekom AG and Vodafone Group Plc for years with 20- euro ($27) mobile voice and data packages. He also bet on niche brands focused on students and ethnic minorities, such as Ortel and Ay Yildiz.

“He’s been in the market for an eternity and has turned E- Plus into a major player,” said Paschalis Choulidis, the CEO of virtual operator Drillisch AG. “He knows what he’s doing.’

Telefonica, based in Madrid, yesterday won European Commission approval for its 8.55 billion-euro deal to buy E- Plus, combining the third- and fourth-largest German wireless operators. The E-Plus deal gives Telefonica some relief from headaches over business in Brazil, its second-largest market.

The Spanish carrier is struggling to meet demands by the Cade regulator to resolve conflicts of interest in Brazil with Telecom Italia SpA. Telefonica owns a stake in Telecom Italia, which is one of its main competitors in the country. One way is for either company to give up its local holding.

Drillisch, a non-network operator, helped Telefonica fulfill one of the conditions placed on the approval by agreeing last week to buy as much as 30 percent of the larger provider’s German network capacity.

Pushing Margins

In Spain, Telefonica is acquiring a cable television broadcaster to strengthen its position amid a battle for market share that has pushed the domestic mobile-phone industry’s profit margins down. The company was told last month that it had to cut how much it charges other Internet providers for the use of its fiber infrastructure.

Dirks, who was not available to comment yesterday, is set to head the German operations following a close of the deal targeted for the third quarter. He will work alongside Telefonica Deutschland Holding AG’s Markus Haas and Rachel Empey as chief operating officer and chief financial officer, respectively.

‘‘It’s a great sign of strength for the new business that we have gained such top leaders,” Empey said on a conference call. “We picked managers from both companies so we can leverage their assets and become the leading digital telecommunications provider in Germany.”

Staff Lunch

Dirks, who is married with one son, mingles with staff for lunch at the E-Plus headquarters in Dusseldorf and tells employees they can call him on his mobile phone anytime, according to a person who has worked with him for years.

Dirks, an electrical-engineering graduate, has worked in the phone industry for almost 30 years. He joined E-Plus in 1996, at a time when mobile telephony got under way in Germany, and was promoted to CEO in 2007. As board member of KPN in charge of international wireless operations, he helped the company dispose of assets in France and Spain.

Under his leadership, E-Plus focused on winning customers on a budget, helping it almost double its client count to 25.5 million. That left Telefonica’s German unit sandwiched in a market segment between the market leaders and E-Plus.

Dirks’s strategy to lure customers with low-price offers has come at the expense of profitability. Earnings before interest, taxes, depreciation and amortization accounted for 30.1 percent of sales last year, down from 37.9 percent the year before and 42.4 percent in 2011.

As Telefonica pulls even with Germany’s traditional market leaders, it will rely on Dirks to show he can also bring in cash, said Stephane Beyazian, an analyst at Raymond James in London.

“The issue was that in Germany the business wasn’t cash- generative enough in a relatively difficult four player market,” Beyazian said. “If they deliver on the synergies they will have a much stronger cash-generative asset.”

--With assistance from Elco van Groningen in Amsterdam.