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Slim's Dutch Drama

2:30 PM -- The sudden rush to snap up chunks of Dutch national operator KPN Telecom NV (NYSE: KPN) is turning into a drama more captivating than an episode of Mad Men.

Eyebrows were raised when América Móvil S.A. de C.V. -- part of the media and communications empire run by the world's richest man, Carlos Slim -- announced it would like to increase its stake in KPN from less than 5 percent to about 28 percent by acquiring shares for €8.00 each. (See Euronews: Slim Picking at KPN.)

That news that sent KPN's share price soaring by 20 percent to around €7.80 during the past few days and prompted the KPN board to announce that, in its view, the offer undervalues the operator and that it would explore its options while reviewing América Móvil's offer.

It then emerged that, just before América Móvil made its move, financial services giant Morgan Stanley had built itself a 10.1 percent stake in KPN.

There's a very good Reuters article that explains why the KPN board has few options and will likely have little option but to welcome any binding offer made in the coming weeks.

So, here's the question. What is Carlos Slim/América Móvil up to exactly? In its filing with the SEC about its intentions, the operator, which is active in 18 countries in Central and Latin America, has 241 million mobile customers and generated revenues of 192 billion pesos (US$14.3 billion) in the first quarter of this year (up 12 percent year-on-year), stated:

    For América Móvil geographic diversification has been key, as it has provided greater stability to its cash flow and profitability and has contributed to its strong credit ratings. América Móvil’s investment in KPN represents its first significant investment in Europe. ... América Móvil believes that both companies will benefit ... and it hopes to explore with KPN areas for potential co-operation, including but not limited to, roaming, procurement, distribution of content and marketing arrangements.


The suggestion is that this is not a financial investment but more a strategic one.

OK, so what about KPN? It's the major operator in the Netherlands and has operations in neighboring Belgium, where it is considering the future of its mobile business, and Germany. Its first-quarter revenues were down 1.4 percent year-on-year to €3.2 billion ($4.15 billion) and its net income was down 51 percent to €288 million ($373 million). (See KPN Earns €288M in Q1 and KPN Reviews Belgium Mobile Biz.)

It's in the midst of a staff reduction program that will see its head count fall by up to 5,000 by the end of 2013 and it's having to increase its capital investments in all three operating markets to keep ahead of, or keep in touch with, its main rivals. The CEO noted in the first-quarter earnings report that "the current financial performance of the company is not in line with our medium to longer term ambition," but that the situation should improve during the second half of the year.

OK, so maybe Slim has had his eye on KPN for a while and sees this as the best time to get an influential stake at the best possible price: Strike before things improve and KPN's share price increases organically.

Continental drift
But this is Europe, and Europe's up merde creek without the proverbial paddle. The euro is in a mess and there's a continent-wide political storm brewing, fueled by the tragic financial plight of Greece, the desperate unemployment situation in Spain, and economic contraction issues in many other European markets. France has a new president and there are concerns that any anti-austerity measures introduced by Francois Hollande might have an impact on Germany, the strongest and most important economy in the region.

And things are getting worse in KPN's home market, The Netherlands. The economy is contracting and the country's ruling politicians are scrambling to find the budget cuts they need to avoid a worsening situation. You can read this Bloomberg article for more depressing background.

Added to that, the European Commission has today introduced measures that, from July this year, will slash the charges mobile operators in Europe can levy on roaming mobile data services to €0.70 per megabyte, much lower than is currently charged and about six times lower than the average tariff in 2009. That might encourage some roaming users to not switch off their data services when they cross European borders, but more likely it will result in lower mobile data revenues for the likes of KPN.

In fact, how much growth is there left in the European mobile market at all? It's a saturated, margin-squeezed sector already and LTE will not be a magic wand for the bottom lines of operator financial reports.

That current scenario doesn't paint much of an attractive picture for investors. Carlos Slim, obviously, sees it differently. And he is the richest man in the world, so he knows a thing or two about making money. And, to be honest, I don't. Quite the opposite. (For the record, I do not own any stocks in any company.)

But is KPN the best investment opportunity in European telecom? And are there any lessons to be learned from the last time operators from the Americas decided that KPN and other European telco vehicles looked like great moneymaking opportunities? KPN Qwest was a disaster that ended in bankruptcy and there were a number of RBOCs that got their fingers stung trying to work with the Europeans. Global One, Concert and AT&T Unisource are names that should still send shivers down certain spines. (See KPNQwest Files for Bankruptcy, Global One Break-Up Deal, What Happened to Unisource? and AT&T and BT to Unwind JV.)

I hope I'm proved wrong and that KPN and América Móvil go on to have a wonderful, enriching relationship that benefits all parties. I just don't see it turning out like that.

— Ray Le Maistre, International Managing Editor, Light Reading

AESerm 12/5/2012 | 5:33:29 PM
re: Slim's Dutch Drama

That's a pretty depressing rundown of economic prospects on the Continent. But the Reuters article talks of KPN being a 'stepping stone' for Slim. And of KPN's German unit E-Plus, which KPN has talked of selling, as being a possible 'beachhead' for his Euro ambitions. Is there much reason to want part of Germany's (or any country's) number 3 mobile player?

digits 12/5/2012 | 5:33:21 PM
re: Slim's Dutch Drama

Well, I think there are many countries where the #3 operator wouldn't bring too much to the table, but in Germany that's not the case - E-Plus is very well established and has 23.1 million customers that generated 794 million euros of revenues (303 million euros in EBITDA) in the first quarter of this year.


 


Those revenues are up on a year ago but have declined QoQ for the past 2 quarters...


All I can say is 'good luck' to SLim and his beachead. And, like I said the article, this is someone who knows how to make a lot of money. KPN's dividends are quite attractive for optential investors - he might even make money just by holding a stake for a couple of years and then selling. We'll see.


And let's see if the investment happens at all, first! :-)

AESerm 12/5/2012 | 5:33:20 PM
re: Slim's Dutch Drama

When the Latin American beaches are crowded, I suppose even the North Sea can look attractive. 

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