EQT could offer a hefty premium for KPN (DEVELOPING)

Bloomberg reports that EQT is exploring an offer for KPN, talking to advisors for input. This is clearly not a takeover based on expected synergies, but on valuation. KPN is slowly morphing into an all-fiber company, which has not translated into its stockmarket valuation. In addition, some value may be created from further separating its networks division froms its retail units.

Assuming EQT takes on KPN's debt, it could pay a sizeable premium for the equity. The FTTH business alone is almost worth the same as KPN's current market cap.

KPN is spending roughly 800 EUR/home upgrading to FTTH, which could be worth (as per KCOM) four times as much. Spending EUR 4.5b on the remaining 5.6m lines would create EUR 13b in value.

Looking at it this way, EQT could pay as much as a 100% premium. This has two main reasons:

• KCOM (200k lines, almost full FTTH) was taken over by Macquarie for GBP 627m or EUR 3,300 per line. KPN's FTTH business alone would be worth EUR 8.6b.
• Iliad's offer for Play (15m mobile subs) of EUR 3.48b implies a value per mobile line of EUR 230. Based on this, KPN's mobile business would be worth roughly EUR 4b.
• The remaining businesses (VDSL, ADSL, DTT, other) have an unspecified value.

The upside has two main reasons:

• KPN builds FTTH at 800 EUR/home, whereas these lines are valued at 4x that amount (as per KCOM).
• KPN suffers a discount as a result of its own (prefs) and the government's (Wozt) protective measures.

Positives

• Bloomberg reported a planned offer for KPN from Brookfield and local pension funds 190131. Never materialised but similar to the latest TDC takeover (Macquarie and 3 Danish pension funds). TDC first rejected a DKK 47 offer, then accepted DKK 50.25 on 180212.
• EQT has a large number of telecoms holdings: Adamo, Zayo, Delta Fiber, Melita, Deutche Glasfaser/inexio, GlobalConnect/IP-Only. EQT Infrastructure V just raised EUR 15b.
• Management is loaded with options, so all it takes is a nice premium for them to agree with an offer.

Negatives

• KPN safeguarded itself against takeovers (based on preference shares), so it would need to be a 'friendly' deal.
• Also, the Wozt law gives the government a right to scrutiny, to prevent 'essential' infrastructure from falling into the wrong hands.
• EQT's Delta Fiber owns FTTP in rural areas, FTTO in business parks, a service provider on several different networks, and mainly: the regional cable company in the Zeeland province. From this perspective, a takeover is a no-go, unless the Zeeland cableco is sold. Ziggo is the obvious candidate, but T-Mobile NL could be interested as well.

Valuation

• KPN closed up 3% at EUR 2.235 for an equity value of EUR 9.4b. Net debt stands at EUR 6.1b, for an enterprise value of EUR 15.5b.
• EBITDA AL TTM is EUR 2.3b and is forecast to be flat to slightly up over 2020.
• KPN revenues (20Q2): total EUR 1.292b
• Consumer: EUR 706m
• Business: EUR 450m
• Wholesale: EUR 149m
• KPN lines (20Q2)
• By technology
• FTTH: 32% = 2.599m lines (of which 1.319m activated)
• FTTC (VDSL): 55% = 4.5m lines
• Other (ADSL, other): 13% = 1.1m lines
• Consumer
• 3.153m households, ARPU EUR 48.5
• 4.580m mobile lines, ARPU EUR 13.4
• Business
• 0.807m voice lines, ARPU EUR 24.3
• 0.334m broadband lines, ARPU EUR 71
• 1.872m mobile lines, ARPU 17.7
• Non line-based revenues from IT and Professional & Consultancy services
• Wholesale
• 0.074m voice lines
• 0.138m unbundled broadband lines
• 0.759m wholesale broadband lines
• 0.758m mobile lines
• Peers
• Fiber-only: KCOM (delisted)
• Taken over by Macquarie for GBP 627m (190715, closed 190819).
• It had 195k FTTH lines and 8k VDSL lines, or say 200k equivalent FTTH lines.
• Mobile-only: Play (being acquired by Iliad)
• Offer from Iliad: enterprise value EUR 3.48b
• It has 15.0m mobile lines with an ARPU of almost EUR 7.