It’s a historic day for KPN: the era of Ad Scheepbouwer as CEO comes to an end on 6 April 2011 when he hands over to Eelco Blok. A good moment then to look back.
Ad Scheepbouwer is in general known as the man who saved KPN from bankruptcy. Not that this really required rocket science: new shares had to be issued, non-core activities defined and sold, and the organization streamlined. That leads to Scheepbouwer’s possibly greatest feat: he significantly reduced the scale of KPN in response to the new technological developments (especially IP and fibre). Also positive were the dozens of acquisitions, just as at his previous company TNT. Not only did this give KPN important assets and customers, it also stopped competitors from growing through acquisitions and eliminated potential competition.
Scheepbouwer also initiated the policy of setting up MVNOs abroad, creating some growth for the company and embracing the open network model. While Tele2 was termed by Scheepbouwer a “parasite” on KPN’s network in 2003, today the unbundlers and wholesale customers are important partners. This vision ensures a new income source and also keeps the regulator Opta at a distance, while also providing a way to attack KPN’s arch enemy: cable. In the debate over the role of Google and other over-the-top players, Scheepbouwer also takes a progressive position and distances himself from the other big telecom operators that want to charge the OTT sector for the network investments required (see our commentary ‘Frankrijk dient zich af te vragen waarom Sony niet meebetaalt aan de kosten van het electriciteitsnet’).
Still, one can ask whether Scheepbouwer is satisfied. His ‘Back to Growth’ strategy for 2008-10 was supposed to return the company to growth, but that is barely the case. Ok, the regulatory environment is against the company (MTA, international roaming) but organic growth is still tiny. Asset sales, takeovers and even forex effects (at iBasis and the international activities at Getronics) have been essential to meet the company’s targets in recent years.
This brings us to a difficult point in the strategy: acquisitions. Were the takeovers of Getronics and iBasis needed? How much in synergies did these really realize? And how much cash? Getronics is only barely cash-flow positive (based on EBITDA minus capex) since early 2010. The company cost EUR 766 million and various parts have been sold since; it is likely a candidate for divestment and at a multiple of 8 times EBITDA the current Getronics could go for EUR 1.2 billion. The question is whether after adding everything up, KPN emerges with anything left over in the end.
Recent interviews given by Scheepbouwer with NRC and Dow Jones give a glimpse into the takeover attempts at KPN. The company itself was approached by three parties, likely Telefonica, France Telecom and possibly AT&T (a rumour form several years back). KPN’s own eye has fallen on Belgacom, One (Austria), O2 (UK), TDC (Denmark) and Sunrise (Switzerland), but in the end the price tags were considered too high.
Another sensitive point is Scheepbouwer’s remuneration. In ten years he has earned around EUR 40 million. The union calculated that he earns 131 times more than a technician. The response to this is usually: look what he has done for KPN. The share price has risen from EUR to EUR 12, the company was saved and streamlined. Another argument is the competition for international executives, where the company has to compete with the high salaries offered in Anglo-Saxon countries. The question is of course whether there was someone else available who could of done the job for a tenth of the price, but that is beside the point. The pay among the top management also received sharp criticism last year, with KPN supposedly making tens of millions available for achieving only short-term goals. Worse, this could lead to the departure of some key personnel, once the bonuses are pocketed.
A final criticism goes to the mega-payout to shareholders. The rescue of KPN, via the issue of new shares, has some similarities to a takeover by private equity investors. The rescue was followed by the sale of assets, rounds of restructuring and large pay-outs, both in the form of dividends and share buybacks. This last element alone has cost around EUR 9 billion since 2004 and in total the company has spent EUR 15 billion. This begs the question, couldn’t the company find anything better to do with this cash? Was there no investment opportunity available with a better return than its own shares? Not just acquisitions but what about its own networks, and more to the point, fibre in the Netherlands? Or in E-Plus and Base which are still the smallest players in their respective markets of Germany and Belgium? How future-proof are the networks on which these activities depend? It’s also highly questionable whether KPN has taken the right approach on the Dutch TV market. As the challenger up against cable, the TV market incumbent, KPN came up with little more than competing on price, despite the rapidly innovating market. The market is changing so quickly, that KPN management’s claim that it’s the ‘smart follower’ starts to look a bit dubious.
Conclusion: Scheepbouwer not only saved KPN, he streamlined it. Positives are the open culture with wholesale customers and over-the-top providers. Less rosy is the current position of the Dutch fixed network, which is facing tough competition from cable. It’s also questionable whether E-Plus and Base are well-positioned for the future now that good network coverage and the ability to offer a triple-play are increasingly important.
I’ll give you three guesses what the new CEO Eelco Block will say on 10 May, when he announces his strategy for the coming years.
