KPN may sacrifice credit rating to keep investing: CEO

BARCELONA Wed Nov 14, 2012 11:39pm IST

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BARCELONA (Reuters) - Dutch telecoms group KPN (KPN.AS) may accept a lower credit rating if that meant it could continue to invest in its networks in the Netherlands, Belgium and Germany.

Speaking at the Morgan Stanley TMT conference in Barcelona, chief executive Eelco Blok also said on Wednesday KPN was reviewing its strategy through 2015 to see how to balance its need to cut debt with its goal of strengthening its operations.

"We are finalizing the business plan through 2015 and in the coming months will make decisions on financial framework, he said, adding KPN had to improve its key leverage ratio.

As part of the review, KPN is studying scenarios involving a dividend cut, asset sales, convertible or hybrid bonds, its credit rating, and, as a very last option, a capital increase, he said.

"One of the outcomes of the process is that, on a temporary basis, we would accept a lower rating to be able to continue to invest," Blok said.

The comment was a departure from the position KPN laid out at third-quarter results on October 23 that it was committed to keeping its credit ratings.

It could also be seen as a sign of the growing influence of new shareholder Carlos Slim's America Movil (AMXL.MX), which owns 27.7 percent of KPN.

Blok said the companies were working closely on what he called significant synergies in procurement, leading the teams involved to speak every week, while he spoke to America Movil a few times a month.

"Their view is fairly clear. They support our investment strategy. They want us to keep investing to strengthen the Netherlands, while pursuing growth opportunities in Germany and Belgium."

Blok said America Movil understood the financial constraints KPN was struggling to overcome.

KPN breached its debt target for net debt to EBITDA (core profit) to remain at a ratio of 2.0-2.5 in the second quarter, caused by falling profit in its Dutch mobile business.

The ratio rose to 2.7 in the third quarter, and may come under further pressure because of an ongoing mobile frequency auction in the Netherlands and a difficult economic environment.

KPN is rated Baa2 with a negative outlook and BBB with a stable outlook by Moody's and Standard & Poor's respectively. Both are investment grade ratings, allowing most funds to invest in the group's debt.

Under pressure to cut debt, KPN slashed its dividend payout to 0.35 euro in July from the 0.90 euro promised earlier for 2012. Analysts have predicted KPN will cut its dividend again next year.

Along with Telekom Austria (TELA.VI), in which Slim has also invested, KPN shares have been the worst performing in the European telecom sector this year. Its shares are down 50 percent compared with a 5 percent decline in a European telecom index .SXKP.

KPN has been struggling with lower profit and sales in the past several quarters in its Dutch business, posting an 11 percent drop in mobile revenue and facing intense competition from cable operators in broadband.

Core profit, adjusted for one-off restructuring costs, fell 12 percent in the third quarter.

Even its German business, usually its healthiest, suffered from greater competition in the third quarter.

"Market circumstances have become more challenging than we thought last year," said Blok.

The situation may intensify early next year because two new players are bidding on mobile spectrum in an ongoing auction in the Netherlands. Analysts are expecting bids from local virtual mobile operator Tele2 (TEL2b.ST) and a possible joint bid from cable operators Liberty's UPC (LBTYA.O) and Ziggo (ZIGGO.AS).

"There is a high probability that there will be a new entrant at end of the auction process," said Blok.

"We are preparing ourselves for this situation, including quadruple-play offers, targeting churn in mobile customer base."

(Writing by Robert-Jan Bartunek in Brussels; Editing by Dan Lalor)

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