The battle for the leveraged buyout of KPN has been hampered by arithmetic and pride. The Dutch telephone operator, valued at 12,000 million euros, has flatly rejected the acquisition proposals of the venture capital companies EQT and KKR. Paying more would dampen the poor prospect of profitability. Overcoming local nationalism is an entirely different challenge.
Despite falling sales, President Joost Farwerck’s push for lucrative high-speed fiber makes KPN a potentially attractive asset. By the end of 2020, 46% of Dutch households will have super-fast connections. A joint investment of 1 billion euros with the ABP pension fund, sealed in March, increases the chances that KPN can meet its goal of extending fiber to 80% of local households by 2026.
The Dutch telco rejects the offers of EQT and KKR, for which paying more would curb the few profitability options
But the numbers, the resistance of the KPN board of directors and the fear of selling Holland’s family silver do not play in favor of the suitors. The Dutch telco said the EQT offering, carried out in conjunction with specialist infrastructure fund Stonepeak, did not carry a price tag. He did not elaborate on KKR’s offer. Assuming bidders were willing to offer € 3 per share, as the Wall Street Journal reported in April, that would value KPN’s equity at € 12.6 billion.
Including some 6 billion of net debt, bidders would need to borrow 12 billion, assuming a leverage of 5 times the ebitda. This would represent a modest internal rate of return of 14%, assuming stable margins and moderate revenue growth, according to our calculations. But the level of indebtedness would have been almost double a currently manageable 2.7 times ebitda, which could have worried Dutch regulators and policy makers.
There are other obstacles. The Dutch telecom company thwarted a proposal by Carlos Slim’s América Móvil in 2013, using a poison pill in the form of preferred shares issued by a Dutch foundation. The mechanism is still in force. Given the unwillingness of the KPN board of directors to enter into negotiations with either party, a larger and unsolicited offer could run into these defenses against an acquisition.
Finally, last year the Dutch government granted itself veto powers over unwanted foreign incursions into its critical telecommunications network. On Monday, The Hague said it was satisfied with the current level of infrastructure investments by Dutch operators, indicating that no structural change is being sought.
Despite abundant cash and low interest rates, buyers looking to buy KPN are faced with a difficult decision.
The authors are columnists for Reuters Breakingviews. Opinions are yours. The translation, by Carlos Gómez Abajo, is the responsibility of CincoDías
