* KPN under pressure in home market of Netherlands
* Private equity, cable op may bid for Belgium unit-sources
* KPN to struggle to get high valuation for BASE-sources
* E-Plus could be next on the block
* Euro telcos weigh asset sales to defend home markets
By Leila Abboud and Victoria Howley
PARIS/LONDON, April 25 As KPN weighs
whether to sell its Belgian subsidiary, in the background lies a
deeper question: Whether the Dutch telecom operator and others
in the industry will retrench further to focus on defending
their home markets.
Sources familiar with the company's plans say KPN is mulling
a sell of BASE, Belgium's smallest operator, and wants 1.8
billion euros ($2.4 billion) for it.
They believe E-Plus, the third German player, which analysts
value at a much heftier 6 billion euros and is the subject of
perennial takeover speculation, could be the next to go.
Both assets were bought a decade ago, just as many of
Europe's former state-owned monopolies, flush with ambition
during the Internet bubble, planted flags far from home in
debt-fuelled acquisition sprees.
Today KPN and its telecom peers are under pressure to
reverse the decline in revenues and profits brought about by the
competition-boosting regulatory measures and the rise of device
makers like Google and Apple, whose messaging apps allow users
to avoid charges for voice and text.
They also must invest heavily in networks to provide the
extra capacity required to manage the smartphone and tablet
That need for funds is leading some, such as Germany's
Deutsche Telekom, Spain's Telefonica, and
France Telecom to question, whether they can still
afford their foreign empires at a time when they no longer have
a growth story to tell investors, and so need to cut debt and
Vodafone reaped roughly $25 billion by exiting France,
Japan, China and Poland last year, while France Telecom left
Switzerland and Austria with 1.67 billion euros.
"All these companies will have to retrench in order to deal
with their debt burden and their need to invest in networks,"
said Robin Beinenstock, analyst at Bernstein Research.
"KPN probably has to sell something to be able to bid in
domestic spectrum auctions this October and avoid a further
credit rating downgrade."
With profits falling in its home market, KPN's debt ratios
are creeping closer to its self-imposed ceiling of 2 .5 times
EBITDA earnings, making it tougher for it to keep dividend
Selling its Belgian arm would buy KPN a little time. An exit
from Germany, a growing business that requires steep investments
to keep up with larger rivals, would be a bolder move.
KPN declined to comment on Thursday about a potential sale
of E-Plus in Germany, but in February it said it was not a
seller. The asset could interest Vodafone, the second biggest
operator in Germany, or the smallest player there, Telefonica.
KPN also reiterated its earlier statement that it was
weighing options for BASE and had not decided on a sale.
The decisions KPN and others large telecom companies make on
whether to sell assets and at what price could alter the
European telecom map in the coming years.
It's also opening the door for cash-rich private equity
firms to scoop up mobile businesses at nearly decade-low
valuations, since there are often few strategic buyers for these
Private equity investors have a list of targets that reads
like a who's who of distressed telecoms companies: Deutsche
Telekom and France Telecom's joint venture in the UK, Deutsche
Telekom's Dutch business, KPN's E-Plus, Telefonica's Ireland and
Czech Republic subsidiaries.
Since KPN's announcement last week, potential bidders for
BASE including cable operator Liberty Global's Telenet and
private equity firms such as Bain, Apax and Providence have
taken a closer look at the market, although no formal sale
process has begun, said people familiar with the situation.
Telecom tycoons such as France's Xavier Niel and Egypt's
Naguib Sawiris have also been on the prowl for assets in Europe
so may look at BASE.
But KPN is unlikely to attract offers for BASE at valuations
as high as those won by France Telecom when it touched off a
bidding war among private equity funds before selling to Apax
Partners for 1.6 billion euros.
Multiple sources evaluating the potential process said
BASE's operating margins were already quite high because of
KPN's cost-conscious management, making the deal less attractive
for private equity, which usually looks to buy cheaply and
squeeze out extra efficiencies.
They also pointed out that overall telecom sector valuations
have fallen since the beginning of the year, with investors
ascribing price-to-earnings ratios near 10-year lows.
One person who tracks such deals predicted that France's
Swiss sale would be the high point with valuations on similar
divestments only going down from here.
"In France Telecom's Swiss unit there was a lot to be done,
so private equity bidders could build an investment case around
improving the branding, cutting costs on everything from
information technology to stores, and expanding in
German-speaking regions," said one source.
"But since BASE has been run as a low-cost operator it will
be very difficult for private equity to create value."
In Switzerland, France Telecom's operating margins were
around 28-29 percent last year, while BASE had margins of 35
The sources also said some 30-40 million euros of investment
would be needed to upgrade BASE's mobile network for mobile data
use and compete with larger rivals Belgacom and
Mobistar, which is majority-owned by France Telecom.
On the positive side, the small Belgian mobile market is
more profitable than Britain or Germany because operators don't
usually subsidise mobiles for customers, analysts say.
Plus since large majority of BASE's customer base consists
of pre-paid users without long contracts, there is an
opportunity to grow by targeting more high-end smartphone users.
Nick Brown, an analyst at investment bank Espirito Santo,
said it was hard to predict what KPN would accept in terms of
price for BASE.
"I think the market would be disappointed if KPN was unable
to sell BASE or sold it too cheaply," he said. "We believe KPN's
management would like to show investors that it knows how to
exit its markets well, especially since a potential future sale
of its German unit might be one attraction for the shares."