European Telecoms Sector Bid

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 |  About: Royal KPN N.V. ADR (KKPNY)
by: Chris Bailey

I published an article about the Dutch telecoms company KPN (OTCPK:KKPNY) at the time of the Telefonica Deutschland deal with the company to effectively merge with their German mobile unit E-Plus.

The conclusion of this report was that the deal in Germany had also highlighted the value in the core KPN stock.

This morning, it appears I was not the only one with this view as the Mexican telecoms mogul Carlos Slim, via his main corporate entity the America Movil telecoms group, has made a bid for the 70% of KPN he does not already own at Euro2.40 [U.S. $3.20] per share, a premium of 20% on the Thursday closing share price for the company.

In the article a couple of weeks ago, we talked about a target share price of Euro2.27 [U.S. $3.03], which already was a good premium to the prevailing share price at the time, so this bid approach is good news.

Carlos Slim / America Movil have the firepower, so funding is not a problem. What strategic game is Carlos Slim playing though in the European telecoms market?

His initial purchase of KPN shares was undertaken on value grounds. Prior to today though, his paper losses on this initial purchase was around Euro2bn. So there is an element of 'doubling down' on his initial view.

However, it is very likely that events of a couple of weeks ago have forced his hand. At the time of the E-Plus deal with Telefonica Deutschland it was reported in the press that Carlos Slim had reservations. Certainly, as our prior report showed, if you remove E-Plus from the KPN group you end up with a classic dull and mature European telecom albeit it with some free cash flow generation capability.

This action puts Carlos Slim back in play to influence whether the E-Plus deal goes ahead or not.

It also forces Telefonica Deutschland on the defensive. It they really want E-Plus then they are probably going to have to bid higher for it.

Now whilst the above rests on whether the America Movil bid gets accepted by shareholders (a 50% acceptance level is required) as well as whether the Dutch government want a say (I rate this unlikely but you never know), KPN retains some speculative appeal even whilst now trading much nearer the Euro2.40 bid level.

I have responded by selling half of my position to crystallize some good gains but am retaining the other half in KPN shares due to the above. A happy Friday indeed.

Disclosure: I am long OTCPK:KKPNY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: (to be precise, I am long the Dutch listed stock)