Nearly 6,000 people will lose their jobs at retailer Phones 4U after the company’s owners paid themselves a £200 million ($324 million) cash dividend, loading the company with debt, and leaving it too poor to negotiate terms with EE, Vodafone and the other wireless carriers who have just walked away from the chain, a source tells Business Insider.
It was also a victim of wireless carriers’ desire to extract cash from the chain to make up for revenue losses due to stricter regulations that have lessened carriers’ ability to charge customers roaming fees and contract termination fees.
Caught between the two opposing forces — its own lack of cash and carriers’ need for more generous revenue terms from their retail partners — Phones 4U found itself without the ability to renegotiate its contracts and keep its partners on board, we’re told.
Phones 4U has now gone into administration (akin to bankruptcy), threatening the closure of 720 outlets and the loss of 5.596 jobs.
Phones 4U is owned by BC Partners, a private equity group. Earlier this year the group took on £200 million in debt in order to pay its owners a one-off dividend, according to the Telegraph a few days ago. “A source said the mobile operator took it of a signal that the private equity owners did not see a long-term future in the business,” The Telegraph noted, ominously.
By that time, Phones 4U had been on notice for several months from EE, Vodafone and other carriers that they were reviewing their third-party retail arrangements. Carriers have been hurting recently because the E.U. has restricted their ability to charge customers for roaming fees. British law also changed recently to let customers cancel contracts more easily without incurring fees.
Both those changes hurt carriers’ revenues. So the carriers went to their retail partners and asked them for more generous revenue split terms on each new customer they brought in, our source says.
Phones 4U’s problem was that following the bond float and the dividend payout, it was not in a position to offer more generous terms and keep its carriers on board, we’re told.
You can see Vodafone hinting strongly at that in its statement on Phones 4U (emphasis added):
“We are saddened to read that Phones4U have gone into administration and the impact that will have on their employees. However, we strongly reject any suggestion that we behaved inappropriately at any stage during our negotiations with Phones4U. The outcome was the result of a transparent negotiation over many months. Phones4U 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 Phones4U 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.”
EE’s statement to the press is a bit more circumspect but has a similar theme (emphasis added):
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.
Business Insider contacted Phones 4U for comment but did not hear back. Stefano Quadrio Curzio of BC, however, told The Telegraph that he blamed Vodafone and the other carriers:
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.”
CEO David Kassler told The Telegraph that Phones 4U was “a good company making profits of over £100 million.”
Apparently, that £100 million wasn’t enough.