EU block on telecoms mergers won’t hurt KPN
Published 26/10/2015 | 02:30
The administration of public policy as far as the telecommunications sector is concerned is often quite Byzantine.
Some time ago, French mobile operator Orange (which is Europe's second largest) said it expected consolidation in the European market and if that was going to happen, it fancied cosying up to KPN, Telcom Italia and Belgacom.
This was wishful thinking because the EU competition commissioner, Margrethe Vestager, had already pledged to crack down on telecom mergers. For instance, she blocked the proposed merger of the Danish units of Sweden's TeliaSonera and Norway's Telenor.
Moreover, she made it clear that the EU is not happy with the concept of a three-player structure; three telecom companies in each country, the exception being Ireland, Austria and Germany. Both the industry and investors were shocked by this declaration of policy. There was an immediate softening of telecom share prices.
I mention this as background to our analysis this week of Dutch telecoms giant KPN, which knows a thing or two about takeover bids. KPN welcomed the Commissioner's decision because it had a few other tools in its toolbox.
KPN is a Dutch fixed line and mobile telecoms company based in The Hague. At one time it was the state-owned fixed line operator and controlled by the Dutch postal service, not unlike the Irish Post and Telegraphs before the 1980s. In 1994, the telecom business was privatised and listed on the Amsterdam stock exchange.
Today, it offers not only fixed line and mobile services, but broadband, data central storage and consultancy, under a number of brands like Telfort, Simyo and Ortel mobile. It has six million fixed line customers in Holland and is the leading mobile operator with three million customers and a 43pc market share.
Two years ago, KPN was front page news when it was the subject of an unsolicited bid from the Mexican Telecom group, American Movil, a company controlled by multi-billionaire Carlos Slim. The bid was to offset domestic pressures in Mexico and to establish a bridgehead in Europe. It floundered on a unique piece of industrial policy known as 'Stichting', a sophisticated poison pill. Following the bid, the Dutch economic minister at the time stated that the acquisition by a 'foreign company' could have consequences for national security and went on to refer to the importance of KPN's network, infrastructure and the services used by government institutions.
Under 'Stichting', a bid can be blocked by the formation of an independent foundation which has the right to dilute the voting rights of ordinary shareholders. As one might expect, an independent foundation was set up, the bid was blocked, KPN was protected and American Movil was forced to withdraw.
Following the failure of the Movil bid, KPN got its skates on. Last year, it offloaded its German operation E-Plus to the Spanish company Telefonica for €5bn and a 20pc holding in Telefonica Deutschland. Early this year, it sold its Belgian business, BASE, to Telenet, a company controlled by American cable group Liberty Global. The sale dilutes KNP's interest in Belgium 14 years after its bid for Belgacom, a bid thwarted by the Belgian government.
KPN results last year were both mixed and challenging. Group revenue, at €8bn, declined almost 5pc but operating profits at €1.2bn increased. Each of its business segments - residential, mobile, business and network - saw revenues decline, as did earnings with the exception of its residential market. The drop of 50pc in earnings in the Dutch mobile market is of concern.
Its offloading of its German and Belgian mobile business is understandable as the revenues and earnings plunged 20pc last year. The KPN share price is €3.40, half that of five years ago, giving it a market cap of €14bn.
The good news is investors are getting a dividend following the sale of its E- Plus business. Hopefully this will continue following the sales of its Belgian operation. Without another takeover, these shares are best left alone by retail investors.
Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.