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Analysis: KPN deal small salve for America Movil losses in Europe
July 24, 2013 / 11:45 PM / 4 years ago

Analysis: KPN deal small salve for America Movil losses in Europe

MEXICO CITY (Reuters) - Carlos Slim’s phone giant America Movil could claw back some paper losses on its KPN stake through the sale of the Dutch company’s German business to Telefonica but the move may raise fresh questions about the Mexican’s long-term European plans.

America Movil owns 30 percent of KPN (KPN.AS) and has so far remained silent about whether it endorses the Dutch telecoms group’s plan, which will cut America Movil’s exposure to Europe’s largest mobile market and benefit its key Latin America rival, Telefonica (TEF.MC).

Analysts expect America Movil to accept the $11 billion deal as a way to recoup some of the losses from almost 4 billion euros it put into debt-laden KPN, an investment which is down about half. Challenging the deal would also be risky without an alternative offer, and could sour relations between America Movil and Dutch regulators, wrote Sanford C. Bernstein analyst Robin Bienenstock.

Some analysts noted that a pull back by KPN from Germany, Europe’s largest mobile market, would be a strategic setback for America Movil, which needs to look outside of Latin America for growth.

“If it was Germany that Mr Slim really wants, his company will have to pay yet more to get it,” wrote Bernstein’s Bienenstock, alluding to the idea - which the Bernstein analysts believe is unlikely - America Movil would have to trump Telefonica’s offer for the unit.

America Movil, which has not been forthcoming with information about its European plans, is likely to face further questions about this latest twist when it reports second-quarter results on Thursday.

“Sharing an investment with your main competitor, it’s not entirely unusual but it is a little peculiar,” said Carlos Hermosillo, analyst at Mexican bank Banorte.

Still, Telefonica’s offer price, which values the German unit at nine times its core profit, or earnings before interest, taxes, depreciation and amortization, is difficult for America Movil to object to, analysts say.

If the deal goes through, it values KPN stock between 2.45 euros and 2.90 euros, bringing America Movil somewhat closer to the average price it paid for KPN shares of around 3.24 euros, according to Sanford C. Bernstein analysts. KPN shares closed at 1.95 euros on Wednesday.

“The deal helps reduce KPN’s leverage level and consequently it helps America Movil cut the losses it has seen on its KPN investment recently,” said Julio Zetina, analyst at Vector Casa de Bolsa brokerage in Mexico City.

KPN said it would use the proceeds firstly to improve its balance sheet and would restart paying a dividend in 2014, meaning Slim cannot count on getting a share of the sale proceeds this year.

KPN said the company’s management and supervisory boards voted in favor of the deal but they would not say how America Movil’s representatives, Chief Financial Officer Carlos Garcia Moreno and Chief Operating Officer Oscar Von Hauske, voted.

British newspaper the Financial Times on Wednesday reported that America Movil’s board members did not vote for the deal and the company is seeking a better price for KPN’s German unit, E-Plus. America Movil declined to comment.

The unit sale by KPN voids a clause in its agreement with America Movil that prevents Slim from launching an offer for the Dutch company. Slim is unlikely to exercise that option given the Mexican company’s debt level and its share buyback program, analysts said.

Jose Martinez, Slim’s biographer, said the deal is bittersweet for America Movil which had hoped to create a solid foothold in Germany when it bought into KPN.

“This is closing the German market to them,” he said.

LEARNING EXPERIENCE

Slim’s investment in KPN, along with a 24 percent position in Telekom Austria (TELA.VI) also taken last year, mark an expensive experiment for the company which has more experience in Latin American markets where it often dominates competition.

Slim and America Movil’s executives have said that the company’s investments are long term and they are not concerned by the drop in either KPN or Telekom Austria’s share prices.

Investors and analysts are more skeptical.

The tycoon’s business acumen and America Movil’s profitability usually mean that when the company does a deal, it gets the benefit of the doubt and is immediately seen as a positive, said Vector’s Zetina.

“In this case, it’s a totally new market with completely different drivers, a completely different competitive situation and America Movil’s competitive advantage is not so clear, so from that point of view, going into Europe has been questioned,” he said.

Jose Otero, president of Signals Telecom Consulting, said the deal demonstrates the high cost of competing in Europe compared to Latin America, where it is much cheaper to build networks and attract customers.

America Movil has not taken an impairment as a result of the decline in KPN’s share price and it has had limited impact on the company’s results, so it has not been a harsh lesson.

The deal leaves America Movil with much reduced exposure to the key German market, and although it strengthens KPN, it is hard to understand the Latin American company’s interest in the much smaller Belgian and Dutch mobile markets.

Left with those smaller markets, it is not clear how the E-Plus sale fits with America Movil’s stated endgame in Europe of learning about the region and investing for the longer term, analysts said.

“This is a learning experience,” said Vector’s Zetina. “It’s still too early to evaluate that experience.”

additional reporting by Tomas Sarmiento, Leila Abboud, Robert-Jan Bartunek, Dave Graham, Alexandra Alper, Jean Luis Arce; editing by Andrew Hay

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