Operators reject Phones 4u administration blame claims

Longstanding UK mobile phone retailer Phones 4u dramatically put itself into administration over the weekend, citing the decisions of Vodafone and, late last week, EE not to renew their current contracts as the reason. While these don’t expire until February and October 2015, respectively, the company felt compelled to call in the administrators immediately.

In a press release entitled “Decisions by Vodafone and EE force Phones 4u to seek Administrator’s protection”, the company stated: “Phones 4u has been informed by EE that it will not be renewing its current contract, due to end 30 September 2015. This decision by EE, which quickly follows a similar recent one by Vodafone, means that Phones 4u is suddenly in a position where it will be without a mobile network partner when the current contracts expires.”

O2 had already jumped-ship at the start of this year and the release claims the decisions by Vodafone and EE came as “a complete shock”, having apparently received recent indications from the two of them that “they saw Phones 4u as a long-term strategic partner.” It points out the company had revenues in excess of £1 billion last year and is still “profitable”, but since Vodafone and EE currently account for over 90% of the connections made by Phones 4u, its position became suddenly untenable.

However, it seems Vodafone and EE are not happy at having been made scapegoats for Phones 4u’s move into administration. “We are saddened to read that Phones 4u have gone into administration and the impact that will have on their employees,” said Vodafone in a statement to Telecoms.com. “However, we strongly reject any suggestion that we behaved inappropriately at any stage during our negotiations with Phones 4u. The outcome was the result of a transparent negotiation over many months. Phones 4u was offered repeated opportunities to propose competitive distribution terms to enable us to conclude a new agreement, but was unable to do so on terms which were commercially viable for Vodafone in the current UK market conditions.

“We were told by the Phones 4u management team that they had little commercial flexibility due to their debt repayment obligations, but that they had a number of alternative strategies in place if we couldn’t reach an agreement with them. So when we terminated our contract earlier this month, we made it clear that we would honour our existing contract, which runs until February 2015, to give them sufficient time to finalise one of those alternative strategies. It is now clear based on the events that have transpired that there were no viable alternative plans in place.”

The theme of frustrated negotiations with the Phones 4u management team has been a consistent one in our subsequent investigations. The company was acquired by private equity group BC Partners in March 2011 for a reported £600-700 million. In a trading update published on the Phones 4u Finance site (the main site is currently down, blaming the Vodafone/EE decision, and even featuring a sad-face emoticon), the sub-headline says: “£430,000,000 9.5% Senior Secured Notes due 2018”. The debt is not referred to again in the update, but seems to confirm relatively short-term debts in excess of 60% of the value of the company.

Last year it was reported that BC Partners issued £200 million of bonds, and that the entire sum raised was handed over to the private equity group through a one-off dividend, apparently to pay out all of the equity used in the original deal. Phones 4u announced EBITDA of £105 million for 2013, but the debt repayment obligations mentioned in the Vodafone statement are likely to have created a fair bit of cash-flow pressure.

EE offered the following statement on the matter: “In line with our strategy to focus on growth in our direct channels and to move to fewer, deeper relationships in the indirect channel, and driven by developments in the marketplace that have called into question the long term viability of the Phones 4u business, we can confirm that we have taken the decision not to extend our contract beyond September 2015. We will monitor developments and work to provide any necessary support for customers who joined EE through Phones 4u.”

Phones 4u closed all its stores today, “…pending a decision by the administrators [PwC] on whether the business can be reopened for trading.” The company has 550 standalone stores and employs nearly 5,600 people. It has requested employees turn up for work regardless in order to be briefed by management.

“Today is a very sad day for our customers and our staff,” said Phones 4u Chief Exec David Kassler. “If the mobile network operators decline to supply us, we do not have a business. A good company making profits of over £100 million, employing thousands of decent people has been forced into administration. The great service we have provided should have guaranteed a strong future, but unfortunately our network partners have decided otherwise. The ultimate result will be less competition, less choice and higher prices for mobile customers in UK.”

Stefano Quadrio Curzio of BC Partners was even less inhibited in seeking to pin the blame for this situation on the operators. “Our overriding concern is for all the dedicated hard-working employees of Phones 4u at a time of uncertainty for the company,” he said.

“Vodafone has acted in exactly the opposite way to what they had consistently indicated to the management of Phones 4u over more than six months. Their behaviour appears to have been designed to inflict the maximum damage to their partner of 15 years, giving Phones 4u no time to develop commercial alternatives. EE’s decision on Friday is surprising in the context of a contract that has more than a year to run and leaves the Board with no alternative but to seek the Administrator’s protection in the interests of all its stakeholders.”

Quadrio Curzio’s remarkable claims could well explain Vodafone’s robust response. As EE’s statement indicates, there does seem to be a shift away from the indirect channel by operators, and maybe they decided that Dixons Carphone is the only major third-party they want to work with in the UK.

Meanwhile there may be 550 phone shops on the market at a knock-down price before long. The incumbent operators may look to snap up a few, but we’re still waiting to see exactly what BT has planned for its shiny new 4G spectrum, so you never know.