European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

Shares of <a href="https://www.smartkarma.com/entities/koninklijke-kpn-nv" target="_blank" data-smartkarma-citation="entities:21122:1" rel="noopener">Koninklijke KPN (KPN NA)</a> closed on Monday 12 October c. 7% higher vs. the previous trading session, the highest level in three months, after Bloomberg News reported on Friday that EQT was considering a potential takeover bid.
<ul>
<li>EQT was said to be in early discussions with advisers on a deal, without any final decision having been made.</li>
<li>Both KPN and EQT declined to comment on the report.</li>
<li>KPN shares had lost 17% since the start of the year until Friday.</li>
</ul>
Given the depressed valuations of telco companies in Europe, the move by EQT is unsurprising, in my view.
KPN has a strong takeover protection against unwanted suitors. It can issue B-shares (preference shares) with the same voting right of KPN A-shares (ordinary shares) as a takeover defense. I believe that, if made, any bid approach should be agreed with KPN’s management in order to avoid higher dilution in KPN’s share capital.
In addition to the poison pill already mentioned, a deal could be blocked by the Dutch government using a law adopted this year that gives the government the option to block takeovers of Dutch telecom companies if they are deemed a threat to national security (source Reuters).
I believe that KPN is an ideal target for Private Equity.
<ul>
<li>KPN is the largest fixed line and mobile operator in the Netherlands (30% market share).</li>
<li>Has strong free cash flows and predictable revenue streams</li>
<li>Has the management capable to efficiently run a mature business</li>
</ul>
Using Capital IQ consensus numbers, a 7.6x EV/EBITDA exit multiple, an acquisition premium of 15% to last closing price (€2.4 per share), an equity portion of 25% and spread of 250bps to 10-year Euro swap rates, I think an offer price of €2.76 could generate an IRR of 13.1% by year 8 (see table below).
On a valuation basis, KPN does not appear expensive, plus there is the upside of a takeover bid. Recommendation is LONG KPN, target price €2.76.

Shares of Koninklijke KPN (KPN NA) closed on Monday 12 October c. 7% higher vs. the previous trading session, the highest level in three months, after Bloomberg News reported on Friday that EQT was considering a potential takeover bid.

EQT was said to be in early discussions with advisers on a deal, without any final decision having been made.
Both KPN and EQT declined to comment on the report.
KPN shares had lost 17% since the start of the year until Friday.

Given the depressed valuations of telco companies in Europe, the move by EQT is unsurprising, in my view.
KPN has a strong takeover protection against unwanted suitors. It can issue B-shares (preference shares) with the same voting right of KPN A-shares (ordinary shares) as a takeover defense. I believe that, if made, any bid approach should be agreed with KPN’s management in order to avoid higher dilution in KPN’s share capital.
In addition to the poison pill already mentioned, a deal could be blocked by the Dutch government using a law adopted this year that gives the government the option to block takeovers of Dutch telecom companies if they are deemed a threat to national security (source Reuters).
I believe that KPN is an ideal target for Private Equity.

KPN is the largest fixed line and mobile operator in the Netherlands (30% market share).
Has strong free cash flows and predictable revenue streams
Has the management capable to efficiently run a mature business

Using Capital IQ consensus numbers, a 7.6x EV/EBITDA exit multiple, an acquisition premium of 15% to last closing price (€2.4 per share), an equity portion of 25% and spread of 250bps to 10-year Euro swap rates, I think an offer price of €2.76 could generate an IRR of 13.1% by year 8 (see table below).
On a valuation basis, KPN does not appear expensive, plus there is the upside of a takeover bid. Recommendation is LONG KPN, target price €2.76.

K P N - E Q T: Prospective Private Equity Bid

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Video is becoming a “killer app” in emerging markets and now accounts for over 50% of data volume on many networks. Low median age, limited WiFi/wired infrastructure and lack of historic association of video with fixed lines makes EM consumers ripe to consume video over mobile. The 3G to 4G migration makes it enjoyable (higher speeds). Most EM consumers are on tiered data packages and video is driving usage to levels that require moving through those tiers. Low voice ARPUs mean mobile internet (MI) is now over 50% of revenues in many EMs and increasing, leading to an overall top line improvement. We think growth will continue and for the first time in a decade we are EM wireless growth bulls.<a href="https://www.smartkarma.com/profiles/1917" target="_blank" data-smartkarma-citation="accounts:1917">Chris Hoare</a> and <a href="https://www.smartkarma.com/profiles/1920" target="_blank" data-smartkarma-citation="accounts:1920">Kirk Boodry</a> anticipate a substantial re-rating of EM wireless operators, and upgrade multiple price targets. Top picks include <a href="https://www.smartkarma.com/entities/15028" target="_blank" data-smartkarma-citation="entities:15028:1">XL Axiata Tbk PT (EXCL IJ)</a>, <a href="https://www.smartkarma.com/entities/1016" target="_blank" data-smartkarma-citation="entities:1016:1">China Unicom (762 HK)</a>, <a href="https://www.smartkarma.com/entities/25977" target="_blank" data-smartkarma-citation="entities:25977:1">TIM Brasil (TIMP3 BZ)</a>, and <a href="https://www.smartkarma.com/entities/953" target="_blank" data-smartkarma-citation="entities:953:1">Bharti Airtel (BHARTI IN)</a>. We have also raised our recommendations on <a href="https://www.smartkarma.com/entities/944" target="_blank" data-smartkarma-citation="entities:944:1">Axiata (AXIATA MK)</a> (from Reduce to Buy) and on <a href="https://www.smartkarma.com/entities/947" target="_blank" data-smartkarma-citation="entities:947:1">AIS (ADVANC TB)</a> (from Reduce to Neutral).EM Wireless growth is inflecting, driven by video<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/035/879/original/em%20wireless%20rev.jpg?1508214198" class="editor-image img-responsive" data-smartkarma-image-id="35879"></figure>

Video is becoming a “killer app” in emerging markets and now accounts for over 50% of data volume on many networks. Low median age, limited WiFi/wired infrastructure and lack of historic association of video with fixed lines makes EM consumers ripe to consume video over mobile. The 3G to 4G migration makes it enjoyable (higher speeds). Most EM consumers are on tiered data packages and video is driving usage to levels that require moving through those tiers. Low voice ARPUs mean mobile internet (MI) is now over 50% of revenues in many EMs and increasing, leading to an overall top line improvement. We think growth will continue and for the first time in a decade we are EM wireless growth bulls.Chris Hoare and Kirk Boodry anticipate a substantial re-rating of EM wireless operators, and upgrade multiple price targets. Top picks include XL Axiata Tbk PT (EXCL IJ), China Unicom (762 HK), TIM Brasil (TIMP3 BZ), and Bharti Airtel (BHARTI IN). We have also raised our recommendations on Axiata (AXIATA MK) (from Reduce to Buy) and on AIS (ADVANC TB) (from Reduce to Neutral).EM Wireless growth is inflecting, driven by video

EM Telcos: Video Growth Drives an EM Wireless Growth Inflection.

Mexico

America Movil SAB de C.V. provides wireless communications in 18 countries across Latin America, the Caribbean and the U.S. The company also offers fixed-line phone, Internet and pay-TV services in most parts of the region.

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America Movil Sab De Cv (AMXL MM)

K P N - E Q T: Prospective Private Equity Bid

KPN is an ideal private equity target due to its strong free cash flows and predictable revenue streams. An offer price of €2.76 could generate an...

Jesus Rodriguez Aguilar

EM Telcos: Video Growth Drives an EM Wireless Growth Inflection.

Video is becoming a “killer app” in emerging markets and now accounts for over 50% of data volume on many networks. Low median age, limited...

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