Breakingviews - Carlos Slim’s KPN cash call includes buyout cover

Mexican billionaire Carlos Slim gestures as he speaks during a news conference in Mexico City, Mexico October 16, 2019.

LONDON (Reuters Breakingviews) - Carlos Slim is putting the wreckage of his failed 2013 takeover of KPN to good use. The Mexican tycoon’s America Movil on Tuesday raised 2.1 billion euros of bonds that can convert into shares of the Dutch telecommunication operator. If KPN stock treads water, Slim effectively borrows for less than nothing. If it recovers, he still has some insurance.

Slim’s 20% stake in KPN has long been an unhappy reminder of his thwarted takeover. America Movil is still nursing a loss on its shares, which cost it an average of 3.24 euros each, according to Reuters. However, Slim has had more success in using the stock as backing for cheap loans. In 2015 he raised 3 billion euros by issuing a five-year zero-coupon bond convertible into KPN shares at a premium. The stock failed to hit the required conversion price, effectively giving Slim an interest-free loan.

His latest three-year bond attempts to repeat that trick but goes a step further. America Movil sold the bonds at a 4.75% premium to their face value, locking in a negative annual interest rate of 1.5%. The bonds are exchangeable into KPN stock at 3.12 euros, a 15% premium to Tuesday’s average price. In essence, investors are paying Slim for the possibility that KPN shares stage a healthy rally over the next three years.

That’s debatable at best. Due to the negative yield, buyers of the bonds need KPN shares to reach 3.27 euros before they make a positive return on their investment. The company’s stock hasn’t hit that level since June 2016.

One thing that might change this is a takeover. KPN’s underperformance has fuelled rumours of a private equity buyout. That would involve a premium for shareholders, and potentially a big payout for buyers of the convertible bonds. But the tycoon has built in some insurance against a sudden bidding frenzy. If KPN shares soar to more than 3.90 euros – 44% above Tuesday’s average price – America Movil can redeem the bonds early, allowing it to keep some of the upside on the shares.

Slim’s painful experience suggests a KPN takeover is unlikely. If he’s right, he borrows for less than nothing. If he’s wrong, however, he won’t be embarrassed.


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