McKinsey will tell Partner to fire workers to fund dividend, acquisition

McKinsey & Company is expected to recommend that Partner Communications dismiss dozens to hundreds of employees as part of a wider restructuring plan.

The mobile communications provider, called Orange in Israel, has about 6,500 workers - at least 1,000 more than its two main competitors, Cellcom and Pelephone.

Last week, Partner dismissed 18 information technology workers from its Internet Service Provider division, but that was unrelated to the wholesale slashing that the consulting firm is expected to recommend.

The company's reports for the past three quarters illustrate the need for the weight-loss program. While rivals Pelephone and Cellcom continued their respective efficiency drives, Partner got increasingly flabby, reporting a 23% plunge in operating profit and a significant decline in its profit-to-sales ratio.

In a statement included as part of the report, the company acknowledged its difficulties, saying, "The company needs to adjust its cost structure. We have already started an efficiency program that should bear fruits during 2010 with the key aim to improve our profitability levels."

Another factor behind the efficiency plan is the fact that Ilan Ben-Dov only just acquired Partner - in August - from the Hong Kong company Hutchison Telecom for NIS 5.3 billion.

To finance the purchase, Ben-Dov needs to restructure the company's capital structure. That includes distributing most of the profits through dividends. Partner already has indicated it intends to issue about NIS 1 billion in dividends. It could issue around NIS 1 billion more to reach a capital structure similar to that of Cellcom.

To pay for that dividend, the company would have to increase its debt burden, which would of course increase its financing costs. At the same time, Partner must continue to distribute a regular dividend. All that neatly explains the pressure on the company to achieve maximum efficiency.