UPDATE 2-KPN warns on 2012 profit and scraps share buyback

Tue Jan 24, 2012 7:12am EST

* Scraps 2012 share buyback programme, ups investment

* To sell Getronics International business

* Sees 2012 as transition year

* Cuts 2012 core profit outlook

* Shares down 5.9 percent (Adds analyst, company comment)

By Roberta Cowan

AMSTERDAM, Jan 24 (Reuters) - Dutch telecom firm KPN has cut its core profit expectations for 2012 and scrapped a 2012 share buyback programme to pour money into its struggling domestic business.

KPN, the largest telecommunications provider in the Netherlands, which has been trying to reverse falling revenues, profits and market share in its domestic fixed-line and mobile businesses, warned on Tuesday 2012 would be a 'transition' year.

KPN, known for its generous annual 1 billion euro share buyback programmes and healthy dividends, said it would invest "strategically" in its domestic infrastructure during current macro economic uncertainty and won't update the market on 2013 expectations until later in 2012.

KPN shares tumbled on the profit warning and by 1000 GMT were down 5.9 percent after hitting their lowest level in six years. They were the worst performer on the Amsterdam AEX index.

Analysts were mixed on KPN's abrupt and some said drastic change of plans as many were only expecting a cut in the share buyback programme to around 500 million euros from the usual 1 billion annually.

Robin Bienenstock from Bernstein said KPN's past was catching up with it and that the generous share buyback policy was not sustainable.

"Massively reducing expectations and eliminating the share buyback in order to reinvest in the core business that is clearly declining at an alarming rate is a very sensible move," Bienenstock said.

The firm also said it would sell the international division of its IT unit, which had 565 million in sales in 2011. There has also been speculation of a more radical shake up of the group.

"Selling Getronics International will tantalise some investors with the possibility that this company (KPN itself) will either be taken private or broken up altogether, but those hopes are unrealistic as this set of results clearly show that KPN Netherlands needs KPN Germany's cash in order to right itself," said Bienenstock.

Both the Chief Executive Eelco Blok and the interim Chief Financial officer Eric Hageman denied KPN is in talks or has been approached by parties interested in KPN's assets.

Blok, a KPN insider, became chief executive in April and has had what he called a 'lively' year. He has increased cost cuts, set new financial objectives, slashed 25 percent of the workforce and has seen his CFO quit abruptly on Jan. 3 over strategic disagreements.

In December, the Dutch telecom regulator and the competition authorities separately put KPN under investigation for possible breaches of regulatory law and for price fixing. Blok said the investigations are ongoing and that KPN is cooperating fully.

Blok blamed falling domestic revenues in part on savvy Dutch smartphone subscribers opting to communicate through Facebook, Twitter and instant messaging rather than by traditional voice calls. He said that KPN's market for corporate customers had also become increasingly difficult and more competitive.

"Some aspects in the performance of The Netherlands did not meet our expectations ... in order to strengthen our domestic businesses in response to the challenges they face from the changing external environment, we will further expand and accelerate our investment strategy beyond the measures we announced in May 2011," Blok said in a statement.

KPN competes in its home market with Vodafone Group and Deutsche Telekom AG which operates under the T-Mobile brand, and increasingly with restructured cable firms Ziggo and UPC.

Ziggo, owned by private equity groups Cinven and Warburg Pincus, and UPC, owned by Liberty Global Inc. , are both wooing customers with bundled packages of super-fast broadband, television and telephone services.

KPN said it now expects 2012 core profit to be 4.7 billion euros to 4.9 billion euros ($6.1 billion to $6.4 billion), down from 5.268 billion euros in 2011. It is guiding for 2012 capital expenditure of between 2-2.2 billion euros and free cash flow of 1.6-1.8 billion euros.

It said it will pay a 2011 dividend of 0.85 cents and still expects a 2012 dividend of 0.90 euro cents but wouldn't confirm its previous 2013 dividend guidance for 0.95 cents.

KPN reported fourth-quarter sales down 1.8 percent to 3.375 billion euros, and core profit, or earnings before interest, tax, depreciation and amortization (EBITDA), down 6.2 percent to 1.316 billion euros. Analysts had expected core profit of 1.367 billion euros on fourth-quarter sales of 3.346 billion euros.

Net profit for the quarter fell 63 percent to 176 million euros, due to a 300 million impairment charge at its IT unit, the CEO said. ($1 = 0.7665 euros) (Reporting By Roberta B. Cowan; Editing by Hans-Juergen Peters and Jane Merriman)