KPN Bites the 3G Bullet

KPN Telecom has taken an eye-watering writedown of €9 billion on its non-Dutch mobile assets that lead it to post a net loss for its second quarter of €9.3 billion (see KPN Writes Down €9B).

Most of the writedown pain -- €6.6 billion of it -- was accounted for by its mobile operations in Germany (E-Plus Mobilfunk GmbH). A revaluation of its German 3G license accounted for €3.9 billion of that figure by itself, with the rest accounted for by goodwill. The company paid €8.4 billion for E-Plus's UMTS license back in August 2000.

Almost perversely, this was regarded as good news. The markets loved the accounting clearout, and the Dutch incumbent's stock was up 9 percent on the Amsterdam exchange mid-afternoon.

But it wasn't just the carrier's honesty that was so well-received. KPN Mobile's EBITDA for the first half of the year was up from €461 million in 2001 to €757 million, with the first-half mobile operating revenues up 6 percent, from €2.11 billion to €2.24 billion.

Part of the improved mobile performance was due to the full consolidation of E-Plus, and part of it to putting the screws on costs.

Other pluses for the mobile business are a slightly greater proportion of post-paid customers and slightly higher revenues per user. On its home turf, 34.2 percent of customers are now post-paid (though that's an increase of just 0.3 of a percentage point), each of which is spending €72 per month, an increase of €1 on Q2 2001.

As for the mighty writedown, KPN CEO Ad Scheepbouwer said that taking the charge was "the only sensible course of action," which could be seen as a comment aimed at the other 3G license holders in Germany, where 3G has taken some stick recently (see German 3G Takes Another Hit). Of course, there is still a question mark over how much that license is worth. Simon Surtees, an analyst at Bear Stearns & Co. Inc., puts the issue a bit more directly than Scheepbouwer: "The amounts paid for the licenses can now been seen clearly for what they were -- a speculative punt on an unproven technology made in the warm afterglow of one of history's greatest speculative bubbles. The rapid deflation in the technology bubble and growing skepticism towards the 3G business model should put paid to continuing to carry German licenses at cost. Period." No need to ask Mr. Surtees to get off the fence, then.

Another contributor to the total writedown figure is KPN's 15 percent stake in Hutchison 3G UK Ltd., a stake "no longer viewed as a strategic partnership." KPN has written down the "net realizable value" of this asset from €1.2 billion to a nice round zero. The stake is now for sale.

Perhaps more ominously for Hutchinson 3G and its 3G equipment suppliers Nokia Corp. (NYSE: NOK), Siemens AG (NYSE: SI; Frankfurt: SIE), and NEC Corp. (Nasdaq: NIPNY), KPN's CFO Maarten Henderson says the Dutch carrier will see if it is "possible not" to pay the €150 million that Hutchison 3G has a right to demand from KPN.

KPN Mobile's capital expenditure plans will also distress the vendors. It now plans to spend only 15 percent to 20 percent of mobile revenues on its infrastructure. For its 3G buildout, KPN's total capex in the Netherlands, Belgium, and Germany up to and including 2005 will be €1.4 billion, light years away from the €8 billion that each and every German UMTS license-holder had been expected to lavish on its network in that country alone. Now things are different. The focus is on "fulfill[ing] the license obligations," and nothing more.

In the run-up to 3G, KPN is pinning a lot of its hopes on i-mode. Scheepbouwer told analysts that "the assumption of €6-€8 [in additional monthly ARPU] seems to be on the conservative side," but he refused to give any figures on the amount spent by the 100,000 subscribers that have signed up so far (see I-Mode Use Doubles in Europe).

— Ouida Taaffe, special to Unstrung
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