KPN says America Movil's $4.2 billion offer too cheap

AMSTERDAM Tue May 8, 2012 7:41pm EDT

The logo of America Movil is seen on the wall of the reception area in the company's new corporate offices in Mexico City February 8, 2011. REUTERS/Henry Romero

The logo of America Movil is seen on the wall of the reception area in the company's new corporate offices in Mexico City February 8, 2011.

Credit: Reuters/Henry Romero

AMSTERDAM (Reuters) - Dutch telecom KPN NV hit back at a surprise move by America Movil to raise its stake in the group, saying the Mexican company's 3.2 billion euro ($4.2 billion) offer was substantially undervalued.

America Movil, controlled by billionaire Carlos Slim, wants to boost its stake to as much as 28 percent as part of a long-term investment strategy that would give it a foothold in Europe after running out of opportunities to expand in Latin America.

America Movil (AMX.N), the biggest cellphone company in Latin America, has already built a 4.8 percent stake in KPN by buying shares on the open market.

"KPN is of the opinion that 8 euros per ordinary KPN share substantially undervalues the company," it said in a statement on Tuesday. "KPN will seek further clarification as to America Movil's intentions ... In the meantime, KPN will explore all strategic options."

If successful, the deal could give America Movil seats on KPN's supervisory board and would give it a presence in Germany, where KPN (KPN.AS) has been trying unsuccessfully for years to merge its E-Plus unit with Telefonica SA's (TEF.MC) O2 Germany.

KPN shares closed up 17.02 percent, bouncing from a seven-year low set earlier this month. America Movil's share price in the Mexican bourse had plunged 8.2 percent by the session close.

"It's management's first instinct to say an offer doesn't reflect the full value of the company. But ... valuation ... is not determined by management, but by investors and analysts," said Ulrich Rathe at brokerage Jefferies in London.

Rathe said a hostile offer would not make sense if America Movil wanted to work with KPN management.

Asked if he thought KPN could try to enlist a white knight, he said there were few likely candidates.

"Clearly this offer came from left field," Rathe said. "I can't envisage another candidate who would take on Carlos Slim. There isn't a long list."

Yet the entry of Slim as a major investor will not solve the structural problems KPN has been grappling with, including tough competition in its home market and a lack of critical scale in its foreign markets.

Itau analyst Gregorio Tomassi compared America Movil's move into Dutch territory to setting up a moon base.

"But now that it has the base, the question is how and when will it colonize the moon ... it is way more difficult," he said.

But the Mexican entrepreneur has a track record of purchasing troubled companies and turning them around.

"America Movil is a long-term investor, we think if the company (KPN) executes (its strategy) well, it will perform well," Carlos Garcia Moreno, America Movil's chief financial officer, told reporters.

He added that there was scope for cooperating in areas such as roaming, content, marketing and procurement.

Garcia Moreno said it was too early to say whether America Movil would pursue other deals in Europe, but suggested KPN would give it a closer look at European markets.

"KPN is the target for our first investment ... We have a long-term investment horizon. We've taken our time. This one seems to make a lot of sense," he told reporters.

BID PRELUDE

Some analysts said the offer could be a prelude to a full bid.

"We believe the 28 percent stake could be a first step to try to gain full control of KPN," SNS Securities said in a note. "Buying an incumbent operator is politically not without risk, which may explain the cautious approach of first acquiring a 28 percent stake."

One investment banker involved in the telecommunications sector said Slim had been looking to invest in Europe for several years.

"What they achieved today really matches their strategy, as they always wanted to start with a moderate investment and see what happens," the banker said.

"It would make no sense for Slim to make a full bid for KPN right now. Instead, it is very shrewd from a non-European company to start with a minority stake and increment it over time ... From Slim's perspective, the stock is cheap and it's a good asset."

One European telecoms executive said the move was an inexpensive way for America Movil to enter Germany, where E-Plus is the second-smallest player.

"You get Germany at a very, very low price," he said.

He added the entry of Slim as a major shareholder would almost certainly end any remaining ambitions for a merger of E-Plus and O2, whose parent, Telefonica, is a major rival of America Movil in Latin America.

"If I was Carlos Slim, I wouldn't buy 28 percent of KPN in order to get rid of E-Plus," he said.

KPN, which traces its origins back to the Dutch government's construction of telegraph lines in 1852, has a 45 percent market share in the Netherlands in fixed line and mobile. It posted core earnings of 5.1 billion euros in 2011 and free cash flow of 2.45 billion.

But the company has been hit by a string of problems under Chief Executive Eelco Blok, a keen sailor and KPN-lifer who took the helm in April 2011, and who has faced criticism from analysts, regulators, politicians and the public.

Ulrich at Jefferies noted that KPN had underperformed the sector on a total return basis by 29 percent over the past year.

"That is relative to a sector which has suffered a lot," he said.

INTENSE COMPETITION

KPN has been struggling to reverse a decline in revenue, profit and market share in its fixed-line and mobile operations as it faces intense competition on its home turf. Its CFO unexpectedly quit in January, citing disagreements over internal governance.

KPN and other mobile phone operators in the Netherlands are under antitrust investigation for possible price-fixing, while the local telecoms regulator put KPN under close supervision in December, saying it may have broken the law to the detriment of consumers and competitors.

Another potential negative is that the Netherlands may get a fourth mobile operator at the next auction of mobile licenses later this year, since the regulator has set aside some spectrum at a low price for a new entrant.

Further competition could mean KPN's mobile business in its key home market will become structurally less profitable.

Under pressure from shareholders to improve performance, KPN has started to look at divestments, including the possible sale of its Belgian subsidiary.

Sources familiar with the company's plans say KPN is mulling the sale of BASE, Belgium's smallest operator, and wants 1.8 billion euros for it.

Earlier this month, Der Spiegel reported that E-Plus was in early talks to sell thousands of cell phone towers to a financial investor to raise funds for network expansion.

Those divestments could be put on hold if America Movil wants to use KPN as a foothold for expansion in Europe, one person familiar with KPN's thinking said.

KPN has been rumored to be a takeover or merger target in the past, most recently in September 2011 when Belgacom SA (BCOM.BR) said a merger with KPN could make sense.

The Dutch company has snubbed three bid attempts, KPN's former chief executive, Ad Scheepbouwer, said last year, but he declined to give names of the companies involved.

MOST CITED

Spain's Telefonica has been most often cited as a possible buyer. The two companies held merger talks in 2000 that collapsed after KPN said it felt the Telefonica board was not committed to the link-up.

A source familiar with KPN's M&A talks said it continued to seek tie-ups or strategic investors to boost its performance, including Chinese telecoms companies.

KPN is struggling to hold on to its market share as it invests in infrastructure in the Netherlands. As part of a major cost-reduction plan, it aims to shed between 4,000 and 5,000 full time jobs, or up to 16 percent of the total, by the end of 2013.

America Movil said it would make a cash offer of 8 euros per share for the shares, a premium of roughly 23 percent to Monday's closing KPN price.

Maurice Mureau, asset manager at Dutch brokerage and asset management firm Keijser Capital, did not expect a rival offer to appear.

"At this price, this is a good moment to say goodbye to KPN shares, so we are selling half our stake this morning," Mureau said.

"KPN's business model is under pressure. They are losing share in the traditional telephone market and the new business in internet is not fully compensating for that. The competition is only getting tougher and things could go any direction. All-in-all a good time to get out of the stock."

Deutsche Bank is advising America Movil on the KPN deal, which would also involve handling the tender offer if it goes ahead, while Clifford Chance is advising it on legal matters.

($1 = 0.7663 euros)

(Additional reporting by Anthony Deutsch; with Robert-Jan Bartunek in Brussels; Sophie Sassard and Georgina Prodhan in London; Ioan Grillo, Tomas Sarmiento and Dave Graham in Mexico City; Editing by Richard Pullin, David Holmes and Andre Grenon)

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