KPN may face full Reggefiber buy-out this year

Monday 6 January 2014 | 12:56 CET | Background

KPN has agreed to increase its stake in Reggefiber to 60 percent. The price still needs to be fixed, but as previously disclosed, it should be in the range of EUR 116-161 million. The regulator ACM also still needs to clear the acquisition. In November 2012, KPN raised its stake from 41 to 51 percent for EUR 99 million. If the latest deal gets regulatory approval, KPN will assume control of Reggefiber and consolidate its results.

Reggefiber recorded in 2012 revenues of EUR 73 million, EBITDA of EUR 54 million and capex of EUR 381 million. The net result was a small loss of EUR 0.7 million, while free cash flow (EBITDA minus capex) was a negative EUR 327 million.

Once it exercises this second option, KPN still has a third option: within seven years of completing the latest deal, Reggeborgh can exercise a put option to sell its remaining 40 percent in Reggefiber to KPN for EUR 647 million, or another "fair value". The fair value applies in the first 3.5 years and the last two years, while the price of EUR 647 million applies for the interim 1.5 years. 


Regulatory clearance from the ACM appears a done deal. It already approved the increase in KPN's stake from 41 to 51 percent, and the options construction was fully disclosed several years ago. Reggefiber is also subject to ex ante regulation. This all makes it very unlikely that the ACM would oppose the deal.


Once KPN reaches 60 percent, Reggeborgh has seven years to exercise a put option to sell its remaining 40 percent to KPN. It has a window of 1.5 years for a guaranteed price of EUR 647 million for the stake (see above). 

Based on the assumed price for the 9 percent stake under the current option (EUR 116-161 million), we calculate the remaining 40 percent is worth EUR 516-716 million. If the current 9 percent stake is valued at EUR 146 million, then we get to the option price of EUR 647 million for the remaining 40 percent. 

In other words, if KPN agrees to pay EUR 146 million or more to increase its stake to 60 percent, the valuation is attractive enough for Reggefiber to exercise its remaining option immediately. In such a case, and assuming the ACM does not take long in clearing the initial deal, KPN may have to pay within only a few months EUR 146 million plus another EUR 647 million to buy out Reggeborgh completely. 


Acquiring the rest of Reggefiber is really a no-brainer for KPN. FTTH is the only future for the copper network, not withstanding the continued development of DSL technology. ADSL2+ is followed by VDSL2, combined with pair bonding, vectoring and likely phantom mode, and after 2014, G.fast will arrive as well. This will increase the capacity of the network significantly (albeit at limited distances). In contrast, FTTH offers substantial cost savings (opex), which we estimate at around 30 percent of the costs of a copper network.

Still, the final bill is a lot: almost EUR 800 million this year to acquire the rest of Reggefiber (see above) plus a high level of capex at the company (some 5x revenue in 2012, putting Reggefiber on par with most start-ups). At the same time, we have calculated earlier that Reggefiber, based on its current balance sheet, is already fully leveraged and cannot take on any more external debt. This all means KPN will be happy to receive the proceeds from selling E-Plus in Germany. If all goes to plan, it should have regulatory approval by May and then receive EUR 5 billion in cash. We'll have to wait and see what it plans to do with the other EUR 4 billion. In addition, KPN will receive a 20.5 percent stake in Telefonica Deutschland. Telefonica will have a call option to to acquire another 2.9 percent in the German company for EUR 510 million, meaning the entire 20.5 percent stake is worth some EUR 3.6 billion.

Reggeborgh versus KPN

The price for the rest of Reggefiber will depend on capex efficiency: how efficient does it invest, how quickly does it achieve economies of scale, how much do new investments contribute to results and how can this best be achieved. KPN and Reggeborgh will need to agree first on which firm will conduct the valuation (an accountant such as PwC or Deloitte) and which method will be used. KPN clearly would benefit from a lower valuation and Reggeborgh from a higher estimate, and they will need time to negotiate the final price. 

In our analysis of Reggefiber's annual results, we already noted a number of issues affecting the valuation:

  • Capex per home added did not improve in 2012 compared to 2011 and was stable at EUR 995. 
  • Capex per home connected did improve, from EUR 1,197 to 1,051 per connection.
  • Capex in total rose 30.7 percent in 2012, resulting in a 65 percent increase in operating cash flow and 76 percent growth in revenues.
  • Revenue per home passed rose to EUR 65 from EUR 53 per connection per year.
  • Revenue per home activated (subscribers) improved to EUR 17.89 from EUR 16.14 per connection per month.
  • Network utilisation (homes activated divided by homes passed) rose to 32.16 percent at the end of 2012, from 28.15 percent a year earlier.

It will be up to the parties involved to decide how capex efficiency is measured, and they will have a lot more financial details at their disposal. The key level is the EUR 146 million for the 9 percent stake, which gives a value for all of Reggefiber (shareholders equity) of EUR 1.62 billion. If KPN is able to keep the price below this, then it probably won't have to buy the rest of Reggefiber in the near future. Reggeborgh will likely then wait for its window somewhere in 2017, when it can get EUR 647 million for its remaining 40 percent stake. 

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