Thursday, December 11, 2014

What next for KPN in 2015?

Let's look at the big picture:
  • KPN heavily outsources and offshores functions. This implies de-emphasising the network, at least at the management level. Things are left to vendors such as Ericsson. NFV/SDN will only add to this. As a consequence, the emphasis is more on services.
  • Market shares are high in general, leaving little room for domestic takeovers.
  • There is ample cash, even taking into account debt reduction (€ 2 bn), pension fund (€ 200 mn), the Reggefiber buy-out (€ 770 mn) and cash outflow at Reggefiber (a total of probably half a billion or so over the next few years). The sale of E-Plus left KPN with € 5 bn and a 20.5% stake in Telefonica Deutschland (value € 2.5). Further, Base (€ 800 mn or more) and iBasis (pocket change) can be sold. In all, the war chest could be € 5.5 to 6 bn.
  • KPN ended its pan-European MVNO strategy a few years ago.
  • KPN wasn't willing to sell to America Movil (at 8 €/share), a very unfortunate decision.
Based on this, KPN is more of a hunter than a target (E-Plus was the company's prime asset). Assets for sale:
  • Netherlands: Caiway, Delta Cable, T-Mobile NL,  Eurofiber (all impossible because of concentration issues), Film 1 (no interest), M7 Group.
  • Europe: Bouygues Telecom, Orange Swiss, Sunrise, Yoigo, fibre operators in Germany & Italy, Telefonica Deutschland.
Creating value, other than focusing on the core businesses, could involve a major strategy shift:
  • Structural separation. Spinning off is a good idea. Network & services are different animals. KPN could retain a stake in the NetCo. Vodafone and Tele2 could buy into the NetCo to speed up FTTH overbuilding.
  • Acquire M7 Group (compare AT&T/DirecTV). This will strengthen KPN's position on the TV market. Vodafone and Tele2 may also be interested.
  • Gain control of Telefonica Deutschland to re-enter Germany, but now as a full-service provider.
  • Buy fibre operators abroad to export the expertise built up in Reggefiber.
  • Buy independent mobile operators across Europe. A tie-up with Proximus could be considered. Or even TeliaSonera, bundling together more incumbents.
  • Takeovers in other parts of the value chain (compare Telstra/Ooyala or Verizon/EdgeCast).
  • Expand in content through a broadcaster: SBS or RTL (compare Comcast/NBC).
  • Sell the company. Possible buyers: Altice, private equity.

Capex: up for differentiation, down for extortion

Capex is weighed carefully against dividends. Capex is for longer term competitiveness, dividends are for short term investor satisfaction.

Reducing capex is hazardous, since it endangers the operator's competitive position. Capex enables differentiation. Smart investors will not be fooled.

If capex is reduced across the board, the cause may not be clear and can be any of these:

  • It's typical herd behaviour of management executives lacking vision, focusing too much on short term dividends for personal gain.
  • It's proof of insufficient competition among ISPs.
  • Market conditions deteriorate for all players, due to general developments (economy, regulation, technology development).
At the end of the day, capex still enables differentiation. Hence, capex reduction seems to point to insufficient competition or bad management.

Threatening to reduce capex appears to be a form of bluff as well as extortion or black mail of governments.

Wednesday, December 10, 2014

Data-only providers: do they add to mobile competition?

There are several new entrants waiting to enter the mobile markets. Most are using LTE as the new, more spectrally efficient technology, which allows players without legacy to disrupt the market.
This is interesting in two ways:
  • How will it affect the market? Will prices drop, as they did in France? How will the incumbent operators respond?
  • Do data-only providers (in Finland, Slovakia, Norway, Sweden and Denmark) add to competition, even if they provide no (legacy) voice/SMS services? Are services such as Skype/Skype Out and Viber/Viber Out considered fully-fledged voice services? And how about WhatsApp, Facebook Messenger, Kik etc. on the texting market?
The latter issue is especially relevant in Norway, where the regulator objects to TeliaSonera and Tele2 merging, even though Ice is launching its mobile data services (the other operator is Telenor). Is this a reduction from 3 to 2 players, or from 4 to 3? Parties have until December 22 to respond.

(In Denmark, TeliaSonera and Telenor are trying to merge, reducing the market from 4 to 3 players (not counting Net 1, only TDC and Hutch 3) or from 5 to 4, depending on your view.)

PwC to telcos: focus on RoI

PwC tells telcos to focus on RoI in its new report 'Capex is king: A new playbook for telecoms execs'.

It provides a clever ranking of telcos, based on IRR and WACC. The winners, 'Value Leaders', have the highest share price CAGR & investor return. They had Capital Value turn positive during the last 3-5 years. "Investors reliably reward such behaviour with superior EBITDA multiples."

PwC's lessons for telcos:
  1. Growth is gone and it’s not coming back.
  2. Focusing on EBITDA and cash does not equate to focusing on value. Your investors know that already, so there is no premium multiple for directly pursuing those objectives.
  3. The key to premium EBITDA multiples has been hiding in plain sight: delivering on the ROI that flows from economies of scale originally promised to investors. Welcome to capital value.
"Delivering on the capex agenda is conceptually simple, but it is not easy to implement, and it puts pressure on execs to have better answers to tough questions."