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Wednesday, 24 July 2013

KPN sells E-Plus for €5 billion and … uses the money to pay a nice dividend: Dutch telecom behemoth suffers clearly from innovation anemia and rather pleases its shareholders.

KPN, traditionally the largest Dutch telecom operator and a former front-runner for innovation in The Netherlands, is a company in trouble.

During the period from 2003-2010, the company has been slowly put asleep by its business model, akin to ‘the goose with the golden eggs’ and it forgot to innovate in time.

KPN’s extremely expensive investments in the German mobile telecom provider ‘E-Plus’ (initial investment had been €20 billion in 1999, of which €13.7 bln already was written off in 2002) and UMTS (3G mobile internet network, also costing billions of Euro’s in initial investments), at the beginning of this century, had almost brought the telecom behemoth to its knees.

Nevertheless, after the pain of these seemingly awkward investments had been taken in the early years of ‘the zeroes’, the company profited from the steady cashflows that these investments delivered:

Domestic services, like fixed telephone, ADSL broadband internet, glassfiber internet and stacked services like 'internet + telephone + television', as well as mobile telecom services, with their cash cows SMS messages, domestic telephone calls and especially roaming calls (calls outside the national territory at horrific prices) all seemed like the ‘money tree’, which you only had to shake to get some.

The low costs and high yields of the roaming calls, mobile internet and SMS messages, which were not yet stopped by EU regulation, turned KPN into an investor’s sweetheart. The company paid high dividends to its shareholders, but unfortunately ‘forgot’ to invest in innovative technology. 

This lack of innovative investments turned the company slowly, but steadily from a front-runner into a laggard.

And then, in 2011, the party seemed suddenly over for KPN: the dropping price per mobile megabyte, emerging telecom price regulation from the EU and especially a host of free smartphone apps (a.o. Twitter, Whatsapp, Ping and Skype), which enabled users to avoid the expensive telecom services ‘roaming calls’ and SMS, created havoc in the business models of the large telecom providers. 

On top of that, the habits of smartphone users changed too: calling became much less important for the heavy smartphone users (read: adolescents and business men), in favor of all kinds of free messaging services.

KPN saw its cash flows erode, while at the other hand the necessary investments to deploy the groundbreaking 4G hi-speed, mobile internet would cost billions of Euro’s. These developments forced KPN to skip the dividend payments for 2012 and, to made things worse, it had to surprise its share-holders with a €4 billion follow-on stock offer. Especially the latter shocked KPN’s shareholders, among whom was Carlos Slim, the multi-billionaire and chairman of Mexican telecom provider América Móvil. Slim lost billions of Euro's in the process, due to plummeting stock-prices.

Today, the news was presented that KPN sold its subsidiary E-Plus to the Spanish telecom provider Telefónica for roughly €8.1 billion: €5 bln in cash and 17.6% of the Telefónica Deutschland (Germany) stock, with a current stock value of €3.1 bln.

The destination for this large amount of cash was rather sobering: KPN wanted to reinstate its dividend payment program at shorter notice than originally planned and it also wanted to lower its debt.

Here are the pertinent snips from a news message on BNR News Radio:

KPN sells its German subsidiary E-Plus to its Spanish peer Telefónica. This news was presented by the telecom corporation on Tuesday, 23 July 2013.

The company receives €5 bln in cash and an interest of 17.6% in Telefónica Germany, putting the total amount to €8.1 bln.

KPN uses the yields of this deal to extend its financial possibilities. The company is at least planning to resume its dividend payments. These payments had to be scrapped last year, due to the disappointing results of the telecom company.

KPN expects that the sale will cause a book loss of €1.3 billion euro in Q3. The eventual size of the depreciation will depend on the valuation of the stock interest in Telefónica Germany.

The money will be used to extend ‘the financial flexibility of KPN’, according to the CEO of KPN, Eelco Blok. “This means reducing debt, as we will lose a substantial part of our yields, coming from this German branch. So this has the highest priority”.

Blok doesn’t want to exclude new future investments. “However, first we want to resume the dividend payments, that we had to stop earlier. Already in 2014, when we assume that this transaction will be finished then, instead of at the end of 2015”.

What the CEO of KPN Eelco Blok means to say through this news message is:

“Dear shareholders.

We have sold E-Plus, which was a bleeder at the beginning and also at the bitter end.

In 1999, when we paid €20 bln, we have blatantly overpaid for this company and that has costed us dearly. We almost shipwrecked our company through this investment and through our second bleeder in those days, UMTS. 

The yields, coming from E-Plus in the years after these events, were never quite enough to earn all this lost money back. Within two years after 1999, we already burned up €13,7 bln on the E-Plus investment and the only way to earn this money back, was by scr*wing you with our peak tariffs and with all hidden expenses for our services.

However, this possibility largely ceased to exist in 2011, due to these frigging EU busybodies with their telecom regulations and to all those darn free smartphone apps.

As E-Plus promised to become a bleeder again and we couldn’t afford to deploy 4G mobile internet in Germany for it, we sold the whole joint to Telefónica for 8 bln euro bucks.

We haven’t found a profitable business model yet, in spite of our two year survey for successful businesses. Consequently, we are utterly clueless about how to invest the €5 bln in cash money profitably.

Therefore we have decided to do something about our debt and further we play for Santa Claus at the international stock exchanges. We hope that our shareholders don’t notice that we are clueless and that they will start to love us again.

With kind, but desperate regards.

Yours sincerely,

Eelco Blok
CEO (and boxing ball) of KPN”

I understand it, Eelco and I see the problems in disguise that you have presented today. 

However, Ernst's Economy for You would not consider for one pico-second to invest in KPN, not even when I would get the stock almost for free. 

Today’s trick cannot disguise that you and your employees all seem utterly clueless about the future of telecom in The Netherlands and abroad. And that is really bad news for investors; something which future dividend payments cannot sugar-coat.

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