Merger Musings Send KPN South

Investors in Dutch incumbent operator KPN Telecom NV (NYSE: KPN) suffered mixed emotions today, as the carrier announced bumper profits of €2.73 billion (US$3.43 billion) for 2003 but added that it had been in merger talks with European mobile group mmO2 plc (NYSE: OOM; London: OOM). (See KPN Reports Full-Year Profit and KPN Ends Mobile M&A Talks.)

The two companies' wireless interests would dovetail nicely, as pointed out early last year by our sister publication Unstrung (see Getting It Together in Europe). KPN has mobile operations in the Netherlands, Germany, and Belgium, while mmO2 has operations in the U.K., Ireland, and Germany.

But confirmation that KPN has been in talks with mmO2, and that the meetings had failed to lead to a mutual agreement, left the market concerned that the Dutch carrier would embark on a hostile bid for the mobile group.

The squishy dealmaking sparked concerns that KPN might become involved in a bidding war and potentially overpay for the assets, as other operators, including Telefònica Mòviles SA, Telecom Italia Mobile SpA (Milan: TIM), and Hutchison Whampoa Ltd. (Hong Kong: 0013), the majorty owner of a number of 3G operators, are believed to be keen on mmO2.

Despite the healthy annual profit -- compared with a €9.54 billion loss in 2002 -- and protestations by KPN's CEO Ad Scheepbouwer that a hostile bid was not planned, the carrier's share price took a dive, losing 6 per cent of its value, or 52 cents, to fall to $8.00 on the New York Stock Exchange. MmO2 headed in the other direction, taking a massive 17 per cent leap of $2.98 to $20.08 on the same exchange.

The M&A rumblings overshadowed the Dutch carrier's results, which were roughly in line with expectations, according to the analyst team at Lehman Brothers. Like its fellow European incumbents, it has stabilized its financial situation compared with the past few years, having cut its costs and debts, leading to a recent ratings raise from Standard & Poor’s (see S&P Raises KPN Ratings to A- and Continental Carriers Continue to Cull). By the end of 2003 KPN had cut its debt to €8.3 billion from €12.4 billion at the end of 2002.

At the same time, KPN has been ramping up its broadband sales. At the end of 2003 it had 746,000 DSL customers, a 39 per cent market share, having added 436,000 during the year (including 137,000 during the fourth quarter). KPN expects to reach 1 million DSL subscribers during the second quarter of this year.

This growth comes as its fixed-line business is on the wane. During 2003, the number of fixed voice lines dropped from 6.3 million to 6.1 million, and the carrier expects its fixed-line sales to fall by between 5 percent and 7 percent in 2004 from €7.4 billion in 2003.

The company is making up for this with additions in its mobile business, however. It added 1.3 million mobile users to its various wireless businesses in 2003, including 500,000 net additions in the fourth quarter. Mobile revenues for 2003 were €5.1 billion, up by 8.5 per cent over 2002.

— Ray Le Maistre, International Editor, Boardwatch