D Telekom displays German talent for compromise

Deutsche Telekom’s landmark agreement with its labour unions is a classic German compromise. It confutes all those prophets of doom that have perhaps been too hasty in predicting the demise of the traditional Rhineland economic model of consensual relations between industry and labour.

It is all the more remarkable given that 50,000 DT employees, or around a quarter of the group’s workforce, have accepted a hefty 6.5 per cent pay cut at a time when Germany is enjoying an economic boom.

Sure, DT has for the past six weeks faced its first serious strike since it was privatised 12 years ago.

It has also been forced to scale down substantially its original demands for a 12 per cent pay cut that it subsequently reduced to 9 per cent before finally agreeing on 6.5 per cent. So was it really worth enduring such a long strike to clinch a compromise that most people in Germany believed was inevitable?

The answer is clearly yes. Unlike its industrial peers that completed their restructurings long ago, a factor now feeding the country’s flourishing economic climate, DT has been struggling to reduce its huge domestic cost base. This at a time of intense competition in its own German backyard where its call-centre employees have been earning up to 50 per cent more than their opposite numbers in rival call centres.

DT now expects to save between €500m ($671m) and €900m a year starting in 2010 thanks to Wednesday’s agreement.

Although it will probably be closer to €500m than the higher figure given the concessions it ultimately made to the unions, the deal nonetheless introduces a sustainable reduction of future salary development since the company will be paying not only old but also new employees less than in the past.

The unions should also be given credit after all their sabre rattling of recent weeks and months for behaving in a classically pragmatic German fashion.

After all, it was in no one’s interest – management, employees, unions or government (still the largest single shareholder) – to allow the situation at DT to continue worsening.

DT’s young new chief executive, René Obermann, has proved a good tactician in securing a deal to push through a restructuring that was launched by his hapless predecessor. He can now start looking ahead again to catching up with his big European competitors such as France Telecom and Telefónica.

These former incumbents have moved far more swiftly in restructuring and refocusing their activities and have been actively engaged in the latest wave of European telecom consolidation.

DT also harbours big ambitions to become a consolidator in European mobile telephony. It certainly has the financial resources to seize an opportunity when one eventually comes up, but until now its hands had been tied by its core domestic cost problem.

Buy-back therapy

Drugs which improve the health of some patients often have no use – or even painful side effects – in others. Plavix, the anti-blood-clotting blockbuster, seems to be having just such contradictory results on the fates of its joint owners, Bristol-Myers Squibb and Sanofi-Aventis.

When a US court upheld the patent on the medicine this week, Bristol’s investors rewarded the company with a sharp rise in its share price. But those in Sanofi-Aventis barely blinked. Indeed, the gains for the US company make the challenge for its French peer still tougher.

Jean-François Dehecq, the chairman of Sanofi-Aventis who has built his group on acquisitions, has long mulled a takeover of Bristol. But as the US company’s lingering uncertainties have dissipated, notably over Plavix and court supervision, its relative valuation is rendering an equity-based bid by its French partner ever more difficult.

Furthermore, the clarity over Plavix’s patent life raises the prospect that Total, Sanofi-Aventis’s long-standing core shareholder with a 13 per cent stake, will now sell, adding to pressure on the drug company’s shares and its ability to buy rivals for shares.

Sanofi-Aventis has recently had other bitter pills to swallow that have not helped, led by Acomplia. It over-confidently talked up Acomplia’s use for smoking cessation and weight loss. The first has been ruled out and the second seems very unlikely to be approved in the US next month.

Rather than focus on Bristol or other large acquisitions, perhaps Sanofi-Aventis should instead buy back its stake from Total and cancel the shares.

That could provide some short-term compensation to investors in Sanofi-Aventis – while sending a sign that its own management has confidence in the longer-term prospects.

european.view@ft.com

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