UPDATE 1-Everything Everywhere to expand stores, network

Tue Sep 28, 2010 1:48pm BST

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* Orange, T-Mobile joint venture on track for synergies

* Q2 revenue falls 4.8 pct, hit by regulation

* No decision on branding strategy yet, review next year

(Adds detail, background)

By Leila Abboud and Georgina Prodhan

PARIS/LONDON, Sept 28 (Reuters) - Everything Everywhere, the new UK joint venture of mobile operators Orange FTE.PA and T-Mobile (DTEGn.DE), said it was on track to deliver promised synergies even as it opens new stores and expands its network.

The overall customer base rose 3.4 percent to 27.9 million in the second quarter, cementing the group's position as Britain's largest mobile operator ahead of Telefonica's (TEF.MC) O2, Vodafone (VOD.L) and Hutchison Whampoa's (0013.HK) Three UK.

"We are well on our way" to the synergy target of at least 3.5 billion pounds ($5.5 billion), Chief Executive Tom Alexander said at an investor day on Tuesday, confirming the company's ambition for double-digit cashflow growth rates from 2010-14.

"We are beyond the defensive phase and are starting to move in the offensive phase," he added.

Deutsche Telecom and France Telecom agreed last year to merge their British mobile units to compete better in Britain's cutthroat market. The merger took effect in July.

Everything Everywhere aims by 2014 to have an EBITDA (earnings before interest, tax, depreciation and amortisation) margin of 25 percent.

Alexander announced two major changes to the strategy the groups had initially laid out. Instead of reducing the number of stores as expected, Alexander said they would increase them to more than 720 outlets but did not say how much it would cost.

"Our retail chain is a key strategic asset which we should expand because the customers we get through retail stay with us longer and spend more," he said.

The company also plans to expand its network by adding mobile base stations to reach 18,000 in total, up from an initial target of 14,000-16,000 at the time of the merger.

It wants to increase capacity to face a boom in mobile data on the networks as more consumers surf the Internet on the go via smartphones and tablet PCs, but emphasised that expansion would not come at an additional cost because it would eliminate overlapping network equipment.

BRAND FUTURE

"We want to be the UK's first super-network, with the best coverage and customer satisfaction. But we will stay within the cash envelope we laid out and reach the synergies targets," said Emin Gurdenli, vice-president of networks, adding that annual operating expenditure would decrease by 154 million pounds.

No decisions had yet been made on the key question of how the operator would handle its branding strategy, and a review would take place in September next year, Alexander said.

The newly merged company continues to sell its services to consumers under the Orange and T-Mobile brands. Investors are watching whether that changes, since this could represent a significant chance to cut costs but also a risk.

Alexander added that the group was experimenting with a new pilot store that would sell both Orange and T-Mobile products.

"If that works and we can have joint stores without confusing customers, then I'd like to do more of that," he said.

Everything Everywhere said second-quarter revenue fell 4.8 percent to 1.72 billion pounds and EBITDA fell 18 percent to 305 million, hurt by lower regulatory caps on mobile termination rates -- the charges operators pay for call traffic across each other's networks. The impact on revenue was 101 million.

Without the regulation effect, revenue rose 1 percent.

The group improved its rate of retaining customers, with average monthly churn falling to 2.2 percent from 2.5 percent. Average revenue per user (ARPU) fell 7.7 percent. ($1 = 0.6318 pound) (Additional reporting by Georgina Prodhan; Editing by Dan Lalor and Michael Shields)

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