BT takeover target forced to write off commission payments years earlyThe collapse of Phones 4U hit EE, Britain’s biggest mobile operator, with a one-off charge of £336m, it has been revealed.
The massive write-down has been disclosed in information provided to BT shareholders as they prepare to vote on the £12.5bn takeover of EE. It meant the net specific items charge in the mobile operators’ 2014 accounts was almost four times as high as in 2014, even including a £78m tax credit to soften the blow of the losses.
The £336m charge represents the commission Phones 4U had been paid for signing up new EE subscriber but which the operator had not yet booked.
Prior to the sudden collapse of Britain’s second biggest mobile store in September, EE would have spread the cost of the commission over the average length of a customer contract, around five years. It was the main factor behind a 22pc plunge in EE’s earnings before interest, taxes, depreciation, and amortisation compared to 2013, to £987m. On the adjusted basis used by BT to value the operator, the figure rose, however.
An EE spokesman said: “As is often the case with dealer partners, we paid a commission for signing, servicing and retaining customers.”With Phones 4U we paid most of the commission up front to achieve better returns on the agreement.
When they went into administration we had to write off these costs early, as an exceptional item, as we could no longer book them over the lifetime of the customer’s contract.”Phones 4U went bust after EE became the last of Britain’s mobile operators to cut ties with it as they sought to deal direct with more subscribers.
The strategy, a trend across the European mobile industry, is designed to increase profit margins by cutting out middlemen so may in the long run have a positive financial impact outweighing one-off costs.
EE has hundreds of its own high street storesFallout from the collapse of Phones 4U, the biggest high street failure since Woolworths in 2008, is continuing. Expensive debts loaded onto Phones 4U by its private equity owner, BC Partners, meant that without its main suppliers the business was forced into administration with the loss of thousands of jobs and closure of hundreds of stores.
EE and Vodafone bought 68 and 148 Phones 4U stores respectively from the administrators to expand their own direct retail footprints. BC Partners blamed the operators for the failure. They in turn said Phones 4U’s debts meant it made uncompetitive commission demands and that the owners failed to respond to apparent industry shifts. A large chunk of Phones 4U’s £430m in senior bonds have now been acquired for pence in the pound by Stonehill Capital Management, a US hedge fund.
The distressed debt specialist has signed a confidentiality agreement with PwC, the retailer’s administrator, for access to the retailer’s files. It could use any information gained to pursue a legal claim. It is understood to be particularly interested in whether BC Partners or Phones 4U management could have foreseen the problems that led to insolvency. BT will assume control of EE’s 580 high street stores subject to shareholder and regulatory approval of the takeover.