A lesson in competition ahead of 1998

A takeover of Mercury Communications by Deutsche Telekom would give the German group a privileged position in the third largest and most liberalised telecoms market in Europe, writes Magnus Grimond.

It would also provide useful experience in a liberalised market before the EU is opened up to competition in 1998.

At present, the European Union is still dominated by state-owned telecoms operators, apart from the UK, where there are 150 licensed groups offering services in competition to BT.

That is set to change, not least following Deutsche's own privatisation, later this year. The sale of the world's third largest telecoms group is likely to be the biggest privatisation yet seen anywhere. With due fanfare, it was kicked off last month by Deutsche chairman Ron Sommer, flanked by Theo Waigel, Germany's finance minister, and Wolfgang Botsch, minister of posts and telecoms. The first tranche of shares, worth pounds 7bn, is scheduled to be sold to the public in November, with another due to go in 1998.

However, the privatisation has been dogged by problems and must still surmount a lack of enthusiasm among both staff and a German populace not used to holding shares. The departure of Mr Sommer's predecessor, Helmut Ricke, in 1994 was said to have been prompted by frustration at his failure to gain agreement from trade unions for large scale voluntary redundancies.

Last November, Mr Sommer reached a deal with the unions whereby 60,000 jobs would be cut by the year 2000, reducing the workforce to 170,000. But morale within the group is now said to be rock-bottom, with over half the 2,000 senior executives ready to leave.

Meanwhile, Deutsche has not endeared itself to customers with a complicated new tariff this year, which raised charges by an average 3.8 per cent and caused street protests in Berlin. It also disappointed analysts last month when it announced that sales had risen only 4 per cent to DM66bn last year, around DM2bn lower than a forecast made the previous June.