The confirmed sale of E-Plus in Germany has created fresh uncertainty at KPN. The stock market reacted as can be expected. Initially the share price rose in a relief rally, as the possible rejection of the sale by competition authorities was already somewhat priced in. Then the price dropped, as the possibility of KPN becoming a 'wallflower' on the market became more apparent. KPN is no longer a takeover candidate, but there are plenty of questions remaining for the Dutch operator.
KPN made a number of promises in connection with the sale of E-Plus. Following its earlier rights issue raising EUR 5 billion, the additional EUR 5 billion cash from the E-Plus sale will further enhance its financial flexibility. The 20.5 percent stake acquired in Telefonica Deutschland is also worth around EUR 1.5 billion.
Vodafone/Orange
A comparison with Vodafone and Orange in this situation can be made:
- After the sale of its stake in Verizon Wireless, Vodafone made some clear choices: the proceeds would in part be paid out to shareholders, some would go towards acquisitions and the Project Spring investment plan was launched. Vodafone also has a strategic plan for the period to 2015 and is looking further ahead with certain targets.
- Due to a weakened balance sheet, Orange has been restructuring its portfolio in recent years (EE and Dailymotion are still for sale) and started the strategic plan Conquests 2015. In January 2013 Orange Horizons was unveiled, in order to invest in countries where Orange has no network presence but could operate as a reseller or MVNO. To date, the main area of expansion has been South Africa.
KPN also has a strategic plan to 2015 (Strengthen, Simplify, Grow) and has restructured. With the proceeds from E-Plus, it's reducing debt to strengthen its balance sheet. The sale was also a condition for resuming dividend payments. KPN management has also pointed to the opportunities for Telefonica Deutschland to take advantage of its strong financial position and take on more debt and increase its dividend. In short, boosting cash is still high on KPN's priority list. This may be welcomed by investors previously negative about the sector, but it's a dubious goal for a telecom company.
Telefonica Deutschland's strong balance sheet also makes it an attractive takeover target, if the Spanish parent company would like to get rid of it. The German subsidiary could even finance its own takeover, through a leveraged buy-out. Now that it's secured E-Plus, this may be preferable than for Telefonica and KPN to hold on to stakes. Other possible bidders include America Movil and Orange.
Invest
Now that KPN has completed its LTE roll-out and decided to scale back its investment in FTTH, there are only a few areas left to invest. First, it must buy out Reggeborgh in their FTTH venture Reggefiber (in total around EUR 800 million) and second Reggefiber still has negative cash flow, as investments will outpace operating profit for several years yet. KPN's recent announcement that it will align its DSL and FTTH packages points to a possible peace in its battle with the cable operators. This creates chances for challengers, such as Vodafone and Tele2 as well as Eurofiber and CIF.
Otherwise the focus is officially on the Netherlands and Belgium. This raises the question whether KPN is satisfied with Base's position in Belgium: a distant third in mobile and a marginal role on the fixed market. There is an opportunity for KPN, together with Reggeborgh, to look at developing FTTH in Belgium. Another possibility is to sell Base to a cable operator (which currently relies on the Mobistar network).
KPN has ways to spend the cash it's receiving from E-Plus: dividend, Reggeborgh buy-out, invest in Reggefiber and possibly in FTTH in Belgium. Furthermore, the company has its hands full managing the situation in the Netherlands, where revenues are deteriorating quickly. The organisation will need to get even smaller in the coming years.
New plan
Still, KPN will need to provide more clarity to the market in the coming months, preferably with a new strategic plan and the appointment of a heavy-hitter CFO (it has had an interim CFO for several months now). What does it plan to do exactly with the cash? Is it heading towards a duopoly with the cable operators? Will Belgium be strengthened or sold? What does it plan to do with the minority stake in Telefonica Deutschland? Where are the acquisition opportunities?
