Canada-based Brookfield Asset Management is considering a bid for Dutch operator KPN, along with two Dutch pension fund managers, PGGM and APG, according to a report from Bloomberg. Whether KPN's management would accept such an offer will depend on the price, as well as the bidder's plans for the company's infrastructure. The limited move in KPN's share price suggests the market doesn't see much chance in the bid.
Financial investors vs telecom management
There is a clear logic to such an offer, even if it may not be in line with traditional telecom thinking. It's unclear what KPN's management and especially its new CEO Maximo Ibarra think on the matter. A takeover bid could come at the right moment though, as the company is preparing for major infrastructure investments.
Brookfield invests mainly in passive infrastructure, such as data centres and masts. PGGM and APG could be candidates to take over the rest of the networks, and the services company could later be sold, or listed on the stock market.
Financial investors like (passive) infrastructure, which offers stable, long-term returns. Other recent examples on the Dutch market include FORE Freedom, E-Fiber and L2Fiber, and a new round of investment in FTTH, FTTO and 5G may attract other new investors.
Structural separation is a convincing model, in line with the vision of financial investors on the telecom market. Networks and services are very different activities, and their value can be maximised by separating the two businesses. However, this type of market thinking has not really penetrated in the telecom sector. Especially the former PTTs remain attached to their strong market positions and vertical integration.
That's not to say structural separation doesn't exist in the Dutch market. KPN itself plays a role, acting on both the active network layer (for its own services and wholesale) as well as the services layer (for retail services) on certain projects. These include CAI Harderwijk and the start-up Digitale Stad, which operates under the name Glasvezel In Het Buitengebied (owned by Delta Rijssen Glasvezel Investeringen, a company of Dick Wessels, the nephew of Reggefiber founder Dik Wessels). KPN also uses this model since taking over the ISP Solcon. In all these cases, KPN doesn't own the passive infrastructure, but provides both wholesale and retail services on the network.
Few international examples
There are not many examples of structural separation on a national level. It is a complex intervention that requires a different vision of the telecom market. The most recent is Danish incumbent TDC (previously Tele Danmark), which was acquired last year by a consortium of Australian investor Macquarie and Danish pension funds.
- Denmark. The takeover included the sale of much of TDC's foreign activities and a structural separation of networks from services. However, both businesses are still owned by the same shareholders, so the separation is not fully realised.
- Australia. This involved the nationalisation of the network and creation of the NBN Co (National Broadband Network). A change in government led to a shift in strategy, amid higher-than-expected costs and various other problems.
- New Zealand. Structural separation successfully divided Telecom New Zealand into two separate, listed companies: Spark for services and Chorus for the network.
- Italy. A financial investor, Elliott Management is pushing for separation at TIM, but TIM only wants functional separation, where it still owns the network (similar to BT and Openreach in the UK). Elliott also has its eye on Telefonica, while the investor Constructive Capital is targeting Telenor. Similar rumours have surrounded Vodafone, and Israel's Bezeq also attracted pressure from investors.
A friendly offer
The KPN bidders would probably like to avoid a hostile bid, given KPN's recent past in such matters. Whether the KPN board would back an offer depends on two things: is the price high enough? And can it accept the new shareholder structure and owners' vision? Such a deal would likely to lead to a break-up of the company in time.
The company has protective measures in place to issue preference shares if needed to block a hostile offer, and the Dutch government has been mulling various measures to protect local companies from hostile takeovers, especially in the sensitive digital infrastructure sector. However, the participation of two of the largest pension fund managers in the Netherlands is likely to remove any concerns of a disruptive or foreign takeover. Any bidder will also need to take account of America Movil, which still holds a 16 percent stake in KPN, after failing in its own takeover bid in 2013. The Mexican company will want a good price for its shares, but has otherwise given up any interest in the Dutch market.
A hostile bid can't be ruled out, but seems unlikely in this case. If so, the new owners would need to replace the management and a period of uncertainty would hang over KPN.
