KPN Needs a Little Dutch Courage

The telecoms industry is getting more competitive in the Netherlands

KPN, the Dutch former telephone monopoly, has a problem.

On one level the carrier has done all the right things to cope with the pressures plaguing the European telecommunications industry -- exiting smaller countries, betting big on all-inclusive fixed and mobile bundles, investing in high-speed fiber broadband, and cutting costs.

Investors have rewarded it: The shares have climbed 17 percent in the past year compared with a 10 percent decline in Bloomberg Industries' European telecoms index. Its enterprise value is more than eight times Ebitda, 13 percent more than its peers.

Fat(ter) Margin

KPN's margins lead many former telecom incumbents in Western Europe

Source: Bloomberg

That valuation may be about to lose its shine. Convergence, where consumers buy fixed, mobile telephony, television and broadband from one company, is hitting the Netherlands hard.

U.K. mobile provider Vodafone and cable group Liberty Global are in talks to team up their Dutch businesses to compete with KPN. Low-cost mobile rival Tele2  is boosting its 4G services in the Netherlands, while Deutsche Telekom's planned sale of its mobile unit would be a negative if one of KPN's domestic competitors acquires scale by buying the business.

The Dutch frenzy has already hit KPN shares, which slipped almost 2 percent on Tuesday on news of the Vodafone-Liberty talks. They fell  again by as much as 5 percent on Wednesday after fourth-quarter earnings missed estimates. The company's target of keeping Ebitda flat this year at about 2.42 billion euros was underwhelming.

KPN's Work Pays Off

Shares rose as investors reward company with steps to stay competitive

Source: Bloomberg

As one of the smallest incumbents in Europe, with a market capitalization of 14.4 billion euros, KPN needs to decide how it will respond to the wave of mergers in the industry, or else another player will choose its fate for it.

As Mexican billionaire Carlos Slim found out the hard way when he tried to take over KPN in 2013, the company's bylaws include a poison pill mechanism that makes hostile bids impossible. (Slim's America Movil has been gradually selling down the 21 percent stake it acquired during its failed takeover bid.)

France's Orange and Deutsche Telekom have both studied KPN as a possible target as they position themselves for the next round of mergers -- this time across borders in Europe. That will put KPN in the sights of more players who might see their way to making a friendly bid.

KPN Chief Executive Eelco Blok said the company would be able to withstand a challenge from Vodafone and Liberty and keep adding customers at the rate it's been signing them up recently.

KPN's Household Growth

CEO Blok says his rate of adding customers can contiune

Source: KPN investor presentation, Q4 2015

Sticking with business as usual isn't going to be enough, especially if Vodafone and Liberty team up to sell the same packages KPN has been so successfully pushing, but at a cheaper price. If he's going to defend KPN's valuation in the longer term, Blok needs to be open to finding a dance partner.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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