KPN has issued a 'position statement' on America Movil's partial bid for the Dutch operator. The statement outlines in detail how KPN's management - at the highest levels - has dealt with the bid, while the company's strategy, first presented in May 2011, is also given another airing. KPN's management has rejected the bid as too low. While it was unable to conclude a deal on selling E-Plus Germany, it will now start the sale process for Base in Belgium.
KPN is not happy with America Movil as its biggest shareholder. To start with, KPN finds the offer of EUR 8 undervalues its shares. The company points to contradictory evidence such as share price targets from analysts, but these cannot be considered the most objective. More to the point, the market clearly finds EUR 8 too high, as the share price continues to trade below this level.
Other points of contention are the fact that a big shareholder could scare off other potential bidders, who may fear having to pay a heavy premium to get the shareholder's consent. A shareholder with 28 percent can also block important decisions and put its own items on the agenda of shareholders meetings. Given that on average only 44 percent of KPN shareholders attend meetings, America Movil would effectively have full control and the ability to determine issues such as takeovers, dividends and appointments. America Movil says it supports the current strategy, meaning the management should not have any problems with the new shareholder. But it cannot be ruled out that America Movil has other motives, such as:
- Synergies with KPN (to be confirmed). KPN names procurement, iBasis (interconnection) and the large enterprise market, but it does sound especially convinced. In Germany KPN claims that synergies from an eventual deal for E-Plus could reach EUR 4 billion.
- A good investment. Investors with a long horizon buy happily when the sentiment is negative (“Buy low, sell high”). While the market is concerned about KPN's balance sheet, obligations (Reggefiber buy-out, spectrum auction in October 2012, FTTH and LTE roll-outs) and tough competition (cable and possibly a new mobile operator), America Movil appears to be less pessimistic.
- Building a pan-European operator. KPN has the Netherlands, Germany and Belgium as well as the international MVNO Ortel Mobile. With America Movil's recent investment in Telekom Austria, it also has access to Austria, Slovenia, Croatia, Serbia, Macedonia, Bulgaria and Belarus. A stake in TeliaSonera could expand the portfolio north and east, with Sweden, Demark, Finland, Norway, Estonia, Latvia, Lithuania, Russia, Turkey, Moldova, Kazakhstan, Azerbaijan, Uzbekistan, Tajikistan, Georgia, Nepal and Spain.
This is a painful development for KPN's CEO Eelco Blok. Since he arrived in April 2011, KPN has issued several profit warnings, unveiled a new strategy which was not really positively received, and the share price has nearly halved. That last point is what brought it to the current situation of America Movil at the door. If the share price falls further, other bidders could emerge. This makes KPN's future uncertain and suggests a break-up ahead:
- E-Plus will sooner or later be sold, with America Movil as a possible buyer.
- Base is up for sale, with Telenet the most likely buyer.
- Ortel and iBasis can also be sold.
- In the Netherlands, the fixed and mobile companies can be separated. Since the start of this year, KPN has already been reporting along these lines. At BT, this already happened years ago. Furthermore, value could be created by the two companies competing against each other. Consumer Residential (fixed) can add mobile services via a MVNO, and Consumer Mobile can use LTE to compete on the (low end) of the fixed market.
- There is also the possibility of splitting the fixed network into providers of passive (with CIF undoubtedly interested as a partner) and active services, with the latter becoming the new 'core' business.
A break-up of KPN is no longer a strange idea, and the question is only how far will it go and who will lead the split. If a private equity player first buys KPN and then conducts a break-up, much of the value will go to the new owners (see Danish operator TDC for an example). If America Movil gains the upper hand, then a spin-off of the Dutch fixed network seems likely. And if the current management gets its way, then only E-Plus and Base will go, based on the notion that the market currently undervalues these assets anyway. It remains to be seen if there is a market player that does value E-Plus or Base sufficiently. If so, they could just as easily buy all of KPN, and get the Dutch activities thrown in as a bargain.
