Wednesday, May 09, 2012

America Movil may swap its 28% KPN stake for 100% of E-Plus and Base

What could Carlos Slim's rationale be for making an unsolicited public offering for a minority of KPN's shares?
KPN finds the price too low, but so does Slim, of course, or else he wouldn't see any upside potential.
Then again, even the people at Blackstone aren't financial wizzards: after buying a 4.5% stake in Deutsche Telekom in 2006 for 14 EUR/share, the stock price declined and now hovers around EUR 8.50.

Here are the options:
  • A purely financial investment, based on KPN's near halving of its share price in a year's time. This doesn't really make sense because based on multiples the stock isn't cheap and the future looks grim: mobile is going down, there may be a new market entrant as early as next year, the broadband market share keeps dropping, TV is not generating much cash, Germany and Belgium are losing momentum.
  • Reducing the overall risk of America Movil. In itself, this makes sense, because its portfolio is heavily geared toward high-risk Latam countries.
  • Taking control of KPN. America Movil will likely demand a few seats on the board. The question remains: why? The KPN management is doing whatever it can and Slim isn't in the position to know better. And synergies will be very limited.
  • A first step toward a full public offer for all of KPN. Hard to tell, but this could be the case. The question remains: why first build a minority share? And what will the KPN management do?
  • Sort of take control of E-Plus. This could make sense. Slim now holds a trump card in the possible consolidation of the German mobile market, where arch rival Telefonica may be looking for an exit to reduce its debt. Slim can easily fund an offer for O2 Germany and create a strong competitor to Deutsche Telekom and Vodafone. Or else he could demand a nice price for E-Plus and exit Europe once he sells E-Plus to Telefonica or anybody else.
Whatever the case is, here is my guess at what will happen next: America Movil will at some point split KPN. Their interest is probably in the mobile assets, and possibly in the non-Dutch ones only: E-Plus (Germany), Base (Belgium) and Ortel (European MVNO). Some assets may be sold off (iBasis) and what remains is a focused Dutch integrated operator (which may spin off its passive network assets to become a service provider - but that's a different story).

Carlos Slim could make this work by swapping his 28% KPN stake for a 100% stake in KPN Mobile International plus debt.