KPN Learns the Value of Prudence

If the French are stylish and the Germans methodical, then the Dutch are prudent. Yet the Netherlands' Royal KPN proved to be one of the most aggressive, free-spending players in last year's European mobile-phone gold rush. It paid $9.5 billion to acquire German mobile-phone operator E-Plus and then $8 billion more for next-generation licenses.

Now, KPN's hard-charging ways have the company near collapse. After piling up $20 billion in debt, with billions more required to finish its new wireless networks, the company has seen its credit rating bounced down to near-junk status. Its stock has plunged to $11, down 85% from last year's high.

FIRE SALE. And on Mar. 26, KPN detailed plans to lighten its debt load and restore its credit rating to A by selling off stakes in 20 businesses. If the company can't raise the $4.5 billion it is hoping for, KPN could be broken up or sold off in pieces to another player. "They are going to have to conduct a fire sale to survive," says analyst David Thomson of FOR Securities, a London investment bank.

KPN's dramatic fall symbolizes the ravages European telecom companies are suffering after their spending binge on wireless auctions and acquisitions. All told, the region's telecom companies are in hock for $300 billion, estimates FOR Securities. France Telecom and Deutsche Telekom carry more than $50 billion each of borrowing on their balance sheets, and British Telecommunications PLC is struggling under $30 billion in debt.

The stocks of the three companies are one-third of their peaks. "The climate has changed from trust to mistrust," says KPN CEO Paul Smits. "You could almost say from blind trust to mistrust."

With most of the European and U.S. telecom companies struggling, it's unclear who will buy KPN's properties. France Telecom, Deutsche Telekom, and British

Telecom also are planning asset disposals. As a result, KPN may be able to get only $3 billion from its sales, according to analyst Jeroen Bos of Fortis Bank in Amsterdam. "It's going to be very difficult to sell at the same time as everybody else," he says. A spokesman for says the company is "pretty optimistic" that it will raise the $4.5 billion it expects. He admits that even then, KPN will be forced to raise an additional $5 billion by 2003 to restore its A credit rating.

PRECIOUS JEWELS. If the debt reduction plan doesn't pan out, the Dutch company may have to part with some of its jewels, such as its stake in KPNQwest, a builder of broadband networks. Or it may have to sell off its precious mobile-phone subsidiary, KPN Mobile, the unit that got the company into its debt trouble in the first place.

KPN wants to sell part of the mobile operation to the public this year. However, such an offering may not raise enough money to solve KPN's woes. One possible buyer for at least part of KPN Mobile is Spain's Telefónica.

Even the biggest kids on the block can't do everything--basic phone, mobile, broadband, and Internet access services. Therein lies the ultimate lesson: Avoid costly gambles and be prudent, as the Dutch are supposed to be.

By William Echikson in Brussels

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