KPN Q1 and rights issue: is EUR 4 bln in extra capital enough?

Wednesday 1 May 2013 | 14:23 CET | Background

KPN recently announced its first-quarter results and the details of its rights offering. Underlying sales and EBITDA were down respectively 4.3 percent and 8.7 percent, and the EBITDA margin was at 34 percent. The rights issue is expected to raise EUR 3 billion, offering existing shareholders 2 new shares for every one share held, at a price of EUR 1.06 per share. This is a discount of 35 percent on the closing share price the day before the details of the issue were announced. The Dutch operator earlier raised over EUR 1 billion in an issue of hybrid bonds to strengthen its shareholders equity.

Below we review the important points at the the various divisions, focusing on the financial side. 

Consumer Residential

The revenue trend is improving, with positive underlying growth after several quarters of contraction. EBITDA is still down due to higher investment costs, with the margin at 17.9 percent. Free cash flow was just EUR 7 million. On the voice market, KPN has returned to growth in the number of lines, albeit nominal, while revenues continue to fall. Voice still accounts for 18 percent of the division's revenues (vs 32 percent three years ago). On the broadband market, KPN grew the customer base for the fourth consecutive quarter, and for the first time in a long time, revenues were also higher. Broadband now accounts for 51 percent of the division's sales (vs 52 percent three years ago). Growth in TV is increasing as well, and TV services have grown to 11 percent of division sales from 6 percent three years ago. The 'other' revenues in the division include the fibre services, and these revenues are growing quickly, up 84 percent in Q1, and now account for 20 percent of total sales (vs 11 percent three years ago).

Consumer Mobile

The trend in revenues for a number of quarters now is a decline of 8-9 percent. Thanks to cost reductions, EBITDA is still growing, and the margin was stable at 36 percent. KPN is still investing heavily, resulting in little free cash flow. The number of subscribers is down slightly over the longer term. Minutes of use per subscriber were down slightly in the quarter, while SMS traffic dropped sharply, to an average 22 per month per customer from 39 a year ago. ARPU also continues to fall.


Revenues were sharply negative, down 7.1 percent on a comparable basis, but thanks to cost savings the margin was maintained at 26 percent. Voice and internet revenues were down 10 percent, while data network services dropped 2.1 percent, mobile fell 3.8 percent, and other revenues (including hardware) declined 8.4 percent. On an adjusted basis, EBITDA fell 11 percent, but free cash flow was stable. On the mobile market, excluding M2M Sims, KPN showed marginal growth in the number of customers. Minutes of use were more or less stable, but the number of SMS per customer was lower. ARPU declined to EUR 48 from EUR 51 a year ago.


Organic sales growth slowed to just 0.1 percent. Tough competition drove an increase in costs, leading to a 33 percent fall in underlying EBITDA. The margin fell to 26 percent, and free cash flow roughly halved compared to the year-earlier period. The subscriber base continued to show strong growth though, so the operator's strategy appears to be working. Minutes of use were lower, and ARPU is also falling. Data use is increasing, and non-voice services have risen to 45 percent of ARPU from 39 percent a year ago. Growth in data revenues accelerated to around 60 percent. KPN says E-Plus' performance is down to its 'data-centric challenger' position.


Comparable sales growth slowed to 1.7 percent, and adjusted EBITDA was down 13 percent. As a result the margin fell to 25 percent, and free cash flow was limited. The number of subscribers has been falling since mid-2012, but Base managed a small increase in the latest quarter. Minutes of use and ARPU are also increasing. Non-voice services have grown to 28 percent of ARPU. KPN terms Base a 'mobile-centric challenger'.

Share issue

The rights issue, if fully subscribed, will triple the number of outstanding shares. KPN aims to raise EUR 3 billion in order to reduce debt. Without the issue of shares and hybrid bonds, its net debt would be at 3.0 times EBITDA. The bonds already reduced the ratio to 2.8, and the share issue should bring this down further to 2.2. This is within KPN's targeted range of 2.0-2.5. 


All together KPN is getting smaller and less profitable. The hope is it can manage its debt load and keep the leverage within the targeted 2.0-2.5 range. While it will continue to reduce costs in the Netherlands, there remain a few serious problems:

  • The Dutch mobile market remains difficult, with growing price competition from on the one hand over-the-top providers (mainly in messaging and chat) and on the other hand new rivals such as Ziggo and Tele2. The mobile success of operators such as Telenet in Belgium and Free in France does not bode well for the future.
  • The Dutch fixed market is doing better, thanks to FTTH. However, the takeover of the rest of Reggefiber will put further pressure on the balance sheet and margins.
  • In Germany, competition is intense and the question is how quickly E-Plus can restore margins. Significant network investments are needed (dual-carrier HSPA, LTE). It's still uncertain whether the company can reach a network-sharing agreement with Telefonica Deutschland.
  • While Belgium and Germany don't appear yet to be suffering from OTT competition, this may not be the case for much longer. 
To sum up, KPN still has some issues to deal with and will need to do its very best in order to overcome the changes in the mobile market. 

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