KPN's share price is trapped in a downward spiral. On 02 November, it closed at EUR 4.83, down from a peak of EUR 12.35 in October 2010 and showing a clear downward trend from around EUR 12 in March 2011. The arrival of America Movil as a shareholder, which built up its 28 percent stake at a price of around EUR 8 per share, has not proven any help. Ziggo, which has offered since 2011 an alternative for Dutch investors, has at the same time shown a steadily rising trend since its listing in March 2011, despite the price recently taking a hit after disappointing growth figures for Q3. UPC meanwhile has just reported record revenues, record sales growth and record free cash flow, despite a small shortfall in growth on the broadband market.
There are multiple reasons for KPN's weak performance:
- Deteriorating revenues from traditional services (especially mobile voice and SMS), which can't be fully compensated by revenues from new services (mobile broadband, fibre, TV).
- Competition from cable, putting the DSL market under significant pressure.
- A stagnating enterprise market, where IP services are taking the place of more expensive traditional services.
- Value destruction in mobile from the rise of (free) Wi-Fi, which can make use of free spectrum.
- The ongoing spectrum auction in the Netherlands, which will cost KPN at least a few hundred million euros. The consequences of this will also include the required roll-out of a LTE network and the arrival of one or two new mobile players.
- The buy-out of Reggeborgh's stake in Reggefiber, which will cost almost EUR 1 billion in the coming years.
All of the above led to a number of worrying events:
- Profit warning and reduced outlook, major restructuring (April 2011).
- An end to the share buyback and cut to the dividend (January 2012).
- Investigation by the competition regulator NMa into suspected price-fixing on the Dutch mobile market (since December 2011).
- Strengthened oversight from regulator Opta (December 2011).
- Weaker balance sheet, missing target for net debt at 2.0-2.5 times EBITDA with current rate of 2.7; S&P cut rating to BBB (February 2012).
- Failed attempts to sell Base, E-Plus and KPN Spain.
- Failed attempt to acquire Caiway.
- And finally the (undesired) arrival of America Movil as a major shareholder.
Of course there were a few positive developments, but these were relatively small: the sale of KPN France, the sale of towers, the takeover of the Reggefiber ISPs and a general improvement on the broadband market as FTTH starts to compensate for losses in DSL. Furthermore, it's not just KPN, but all the European incumbents that are struggling with the rapidly changing consumer behaviour.
While one could forgive management for not foreseeing some trends (such as the explosive growth in over-the-top services such as WhatsApp), the series of negative events does not offer the investor any confidence. This is also reflected in estimates for profits and the corresponding dividend. When Eelco Blok took over as CEO, the discrepancy between on the one hand the promised dividend and on the other hand the share price increased, leading to an unrealistically high dividend return (dividend divided by share price). It was as if investors knew before KPN's own management: this dividend is not sustainable. And yes, it has since been drastically reduced.
Conclusion: KPN is facing tough times as a result of the migration to IP services, the rise of over-the-top services and a number of looming financial obligations (auction, LTE network, Reggeborgh). Competition is also difficult at the network level: in addition to the cable sector, there is a good chance it will face new mobile competitors, and even Wi-Fi is a competitor. Drastic times call for drastic measures - and KPN's management may need to look in an entirely different direction if it hopes to survive the current downturn.
