KPN Gets Trendy

Dutch incumbent KPN Telecom NV (NYSE: KPN) has been at the heart of two ongoing European telecom trends -- the growing interest in Central and Eastern Europe, and the desire of regulators to cut termination fees.

The carrier's involvement with central Europe was as the joint seller of a stake in Cesky Telecom a.s., the Czech Republic's incumbent operator. Telsource NV, a joint venture between KPN and Swisscom AG (NYSE: SCM), sold its 27 percent stake in Cesky for about €680 million to institutional investors.

The stake was originally acquired by Telsource in 1995 for US$1.45 billion when Europe's carriers were in expansion mode and investing outside their home territories. Now the trend among the former PTTs is to sell stakes in non-core activities and pay down debt, something KPN has managed to do quite successfully in the past few years (see KPN Reports Q3 Profit). Swisscom is one of the few European carriers that didn't get into debt problems: It plans to use the €333 million it will get from the sale to pay a special dividend and buy back shares.

The stake was snapped up quickly, a sign of "positive sentiment that investors have towards Cesky," according to a research note from Prague-based investment group Atlantik Financial Markets. The Czech government still holds a 51 percent stake in Cesky Telecom, but plans to privatize the operator before the end of 2004.

The fact that Telsource had no problem offloading its holding should come as no surprise. Central and Eastern European operators are attracting attention and investment as countries in the region liberalize their economies and invest in communications infrastructure, particularly mobile networks and IP infrastructure (see Eastern Europe Has Promise, Europe's Hot, Say Carlyle Bigwigs, and Europe's VOIP Scene Is Hot). The Czech Republic is one of 10 countries, mostly East European, that are due to join the European Union in 2004.

But as KPN's investors watched a few hundred million euros roll in the door, Dutch regulator OPTA cut the tariffs charged by the mobile operators for terminating calls to mobile phones, a move that will affect KPN's revenues in the coming years (see KPN Hit By Fee Cut). The national operator, which owns market leader KPN Mobile, estimates the tariff cuts will hit its 2004 revenues by €250 million and its 2005 revenues by €410 million.

KPN recorded third-quarter net income of €172 million on revenues of €3,082 million. The Dutch firm's share price was up 16 cents, or 2 percent, at $8.02 at midday today.

The regulator's decision, designed to lower prices for customers and encourage more calls from fixed lines to mobile phones, follows a similar move in the U.K. (see Carriers Lose Termination Fight), while other European countries are expected to impose similar tariff cuts (see Carriers Cash In on Termination).

— Ray Le Maistre, International Editor, Boardwatch