KPN Plans $5.4 Billion Share Sale as Earnings Miss Estimates

Royal KPN NV, the Dutch carrier partly owned by Carlos Slim’s America Movil SAB, will sell 4 billion euros ($5.4 billion) in shares after pouring cash into fast-wireless spectrum.

KPN shares fell as much as 25 percent, the most since it started trading in 1994, and closed down 16 percent in Amsterdam, erasing about 930 million euros in market value. Since May, when America Movil said it would increase its KPN stake to 28 percent, a 2.66 billion-euro commitment, the stock has slumped 47 percent, the worst performance in the 25-company Europe Telecommunications Services Index.

The former Dutch phone monopoly spent 1.35 billion euros on spectrum for faster mobile networks in the fourth quarter, undermining its debt-to-earnings ratio. Speed is key for carriers as consumers flock to smartphones such as Apple Inc.’s iPhone and handsets based on Google Inc.’s Android system to surf the Web, download music and watch videos. KPN faces a new challenge from Sweden’s Tele2 AB, which bought frequency to enter the market.

“KPN’s financial position has been impacted by rising debt levels combined with increased commercial investments,” Chief Executive Officer Eelco Blok said in a statement. The capital increase and lower dividends “will support our financial position in the coming years,” he said.

Slim’s position on the share sale is unclear, Blok said on a conference call today. An America Movil official, who asked not to be named under company policy, declined to comment on the billionaire’s plans.

Strategic Flexibility

The Dutch company said it may raise part of the capital increase, which would represent about 80 percent of its current market value of about 4.9 billion euros, through equity-linked or other capital instruments. It will use the proceeds to increase “strategic flexibility” and reduce debt and said it believes the issue will “support its commitment” to maintain an investment-grade credit rating.

“The rights issue is larger than expected,” said Frank Claassen, an analyst at Rabobank. “It is a heavy measure they’re taking. The earnings are disappointing and there’s no clear outlook,” he said.

KPN had a fourth-quarter net loss of 162 million euros compared with a profit of 176 million euros a year earlier, the Hague-based company said in a statement today. That missed the 362 million-euro profit average estimate of eight analysts compiled by Bloomberg. Revenue and other income declined 3 percent to 3.27 billion euros, due partly to falling sales in the Netherlands, where the market environment was “difficult.”

Increasing Competition

The company said it won’t pay a final dividend for 2012. It forecast a dividend per share of 3 euro cents for 2013 and 2014 and a return to growth from then on.

To battle declining revenues and increasing competition in its home market, the CEO is working through a companywide overhaul that will eliminate as many as 5,000 jobs in the Netherlands by the end of 2013.

Earnings before interest, taxes, depreciation and amortization fell 15 percent to 1.12 billion euros in the quarter. The company said the next phase of its German strategy is expected to lead to service revenue growth combined with a lower Ebitda margin, especially in 2013.

Credit Rating

Fitch cut KPN’s credit rating to BBB- from BBB after the company spent almost 1 billion euros more than the ratings firm expected on mobile licenses, analysts led by Owen Fenton wrote in a report on Dec. 17. The ratings company today said the share sale shows KPN “is committed to maintaining its investment-grade profile,” while quarterly results show the company continues to operate in a “challenging environment.”

The cost of insuring KPN debt against default tumbled the most in more than five years. Credit-default swaps linked to KPN dropped as much as 32 basis points, or 18 percent, to 149, the biggest same-day decline since August 2007, according to data compiled by Bloomberg.

KPN’s bonds climbed, leading securities in Bank of America Merrill Lynch’s Euro Non-Financial Index. Its 3.25 percent note due 2021 rose 1.6 cents on the euro to 100.25 cents at 4:04 p.m. in London, the most since it was sold in July, Bloomberg prices show.

Competition will intensify in the Dutch mobile market after Sweden’s Tele2 took part in the frequency auction to become the fourth network operator in the country after Vodafone Group Plc and Deutsche Telekom AG’s T-Mobile unit. All Dutch business segments remained exposed to lower traffic volumes in the fourth quarter, KPN said.

Potential Merger

Last year, Blok tried unsuccessfully to sell KPN’s Belgian mobile-phone unit Base and ended discussions on a potential merger involving the Dutch company’s German E-Plus wireless unit and Telefonica SA’s business in Germany.

“The key takeaway for me from the capital increase is that they have a new strategy,” said Javier Borrachero at Kepler Capital Markets. “They want to keep all three assets, The Netherlands, Belgium and Germany, and want to become more aggressive to be more competitive in the future.”

The CEO, who was promoted to the top job in April 2011, said in October that KPN was in talks with investor America Movil to shape cooperation efforts after Slim’s wireless carrier obtained more than a quarter of the Dutch company’s shares in an unsolicited bid.

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