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Memo to Dutch Telecom KPN Shareholders: Take the América Móvil Money and Run


Why Carlos Slim is interested in KPN and why his offer is fair.

The Dutch telecom behemoth KPN (KPN.AS) is currently in the cross-hairs of América Móvil (AMOV), the Mexican telecom company owned by the world's richest man, Carlos Slim.

A few weeks ago, the news broke that Slim had showed interest in collecting a decisive minority share of 28% in KPN for a price of €8 per share.

The former Dutch state monopoly (which is currently going through a difficult time with the Dutch and European cellphone and mobile Internet market) was not amused and stated that the offered price was much too low. Shareholders of América Móvil (or AM), on the other hand, found that the offered price was too high and punished AM with a substantial drop in market value.

Here are the background details on this deal from two articles featured in the Dutch newspaper Het Financieele Dagblad (, both from Wednesday, May 9:

Claiming control in KPN for a bargain price

Carlos Slim, the extremely wealthy owner of Mexican-based telecom giant América Móvil, is a smart man. He tries to get the keys of the vulnerable Dutch telecom company KPN at a bargain price.

KPN has a new board of directors and is weakened by a series of profit warnings. With a targeted stake of 28% of outstanding KPN stock, Slim remains under the magical limit of 30%, avoiding the obligation of bringing out an offer on all remaining shares [of] KPN. This saves him €8.2 bln in take-over expenses, but offers in fact the same result: He gets control over KPN.

When this tactic succeeds... América Móvil books two results at the same time. AM has built up a stake of 4.1% in KPN stock. At the moment that this stake passes the 5% threshold, the Dutch Authority Financial Markets is forced to publish the news on this stake, making the Mexican interest in KPN public information. Normally this would have led to soaring stock rates for KPN. By offering a partial offer of €8 for a 28% stake, the Mexicans prevent the emergence of fantasy prices in KPN stock.

Even more important is that AM with a 28% stake in KPN keeps potential competitors out of the way and gains almost total control in KPN. The reason is that shareholders' meetings in The Netherlands seldomly attract more than 50% of all shareholders. If the presence at the shareholders' meeting is less than 56% of all shareholders, AM decides with 28% of all shares... what happens with KPN in the future.

The supervisory board of KPN stated today that the offer of AM is "undesired."

The shareholders of América Móvil were less enthusiastic about this offer for shares KPN. Again from the FD:

Exchange rate of América Móvil lower after offer at KPN stock

The stock of América Móvil, the company that announced on Tuesday, May 8, it wanted to purchase a large stake in KPN, dropped dramatically this Tuesday.

Investors devaluated the share by 8% at the Mexican stock exchange.

"We find this offer in KPN not very cheap for a non-controlling stake in a company whose EBITDA-profit and net profit in 2012 might drop by 5.9% and 6.2%, according to our forecasts," said Valder Nogueira, Head of Stock Research at Banco Santander in Brazil. 'We think that the market will take some profits after recent good news in a mixed reaction at a transaction that is not particularly cheap.

On Tuesday, May 29, América Móvil confirmed their offer of €8 by launching it officially and irrevocably, although it was called "substantially too low" by the KPN management. Between May 30 and June 27, shareholders of KPN can offer their shares at the offered price until a stake of 27.7% is reached.

This is a peculiar situation: The KPN management thinks that the offer was too low, while AM shareholders considered the offer to be too high. Who is right?

Normally, if you looked at the KPN stock rates during the last three years, the €8 offer seems very low indeed.

During the last three years, the KPN stock has been well above the €8 threshold. In addition to solid profit, the company has stakes in a few important European telecom companies, like E-Plus in Germany and BASE in Belgium.

However, the catch for KPN is the development of the international telecom market. While the importance of fixed telephony has already been shrinking for a number of years, it seemed for a while that the cellphone market was the goose with the golden eggs in The Netherlands and beyond.

But this changed with the emergence of the smartphone in Europe and the introduction of a number of (almost) free apps, limiting the profitability of mobile telecommunication; Skype, Ping, Whatsapp, and other free apps enable telephone traffic and instant messaging over the Internet.

Attempts by KPN and two of its main competitors/colleagues T-Mobile, which is a branch of Deutsche Telekom (DTEGY.PK), and Vodafone (VOD) to silently pinch off certain Internet services hit a wall of protest and eventually legislation. According to the new Dutch legislation, the Internet should be fully accessible from a smartphone.

On top of that, the "coincidential," almost simultaneous price-raises of KPN, Vodafone and T-Mobile within two weeks raised eyebrows at the OPTA, the supervisory body for the Dutch telecom market, which started an investigation concerning this topic.

Since then, the seemingly unlimited profits from telecom seen throughout the first decade of the new millennium, have dried up. It was my prediction that mobile Internet would eventually turn into a utility:

In my opinion, fixed Internet and mobile Internet will become normal utilities in the near future, just like electricity is a normal utility. You don't think about it; you don't compare it often with the offers of other providers (maybe only once a year when the contract expires)… It just needs to be there when you plug it in, at the highest quality and against the lowest possible price.

Currently, there are lots of tricks and stunts that telecom providers pull to keep customers under contract, while paying lots of money:
  • Exclusive phone contracts (Apple (AAPL)) with high subscription and usage fees;
  • Cheap or free smartphones (non-Apple) with high subscription and usage fees;
  • Opaque contracts and subscription forms that are impossible to comprehend for normal citizens;
  • Contract-limits for data usage;
  • Very expensive data usage beyond the contract-limits; and
  • Pinched-off access to free apps that substitute dearly paid telecom services.
I think this business model will disappear to be replaced with a business model that treats fixed and mobile internet as a utility. The customer buys a phone and pays a very limited fee per month for Internet bandwidth. All "classic" telephone actions (calling, SMS-ing) will go via IP connections, as there is no need anymore to use the classic digital voice or data connections.

I'm still of this opinion; based on that, I think it would be a smart move for the Dutch shareholders of KPN to take the money of América Móvil and run.

KPN has been and still is a very good company. Shareholders can expect decent profits in the future along with technological innovation. However, I strongly doubt that the company will be the same money machine it has been before. The same is true for its main competitors in The Netherlands and abroad: T-Mobile, Vodafone, Téléfonica (TEF), and others.

Any further concentration of telecom power, in order to save costs, will (in my opinion) lead to an intervention from the European Commissioner for Internal Competition as any merged entity would become too powerful in European terms.

From my "mobile Internet as a future commodity" point of view, it is doubtful that European telecom providers can keep prices for mobile Internet as high as they are today, unless they break every rule concerning a level playing field, such as making illegal price agreements and dividing the telecom market among themselves. If the prices for mobile Internet remain too high, powerful competitors from the Americas, Asia, and perhaps even Africa will undoubtedly emerge.

The current telecoms have exclusive sales of Apple iPhones in certain countries, and that arrangement may lose its attraction in the near future. The power of the Apple brand is still strong today, but I expect that soon people won't be willing to pay €600 plus for an Apple telephone with an exclusive, expensive subscription.

When you look at KPN with these assumptions in mind, €8 suddenly seems a fair offer.
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