Breakingviews - KPN adds Dutch fibre to Europe telco buyout buffet

KPN logo is seen at its headquarters in Rotterdam, Netherlands, January 30, 2019.

LONDON (Reuters Breakingviews) - The European telecommunications buyout buffet just added a meaty Dutch main course. Private equity firm EQT is casting a hungry eye over KPN, Bloomberg reported on Friday. At 16 billion euros including debt, the former Netherlands state monopoly would make a sizeable meal, rendered all the chewier by the need to keep the government on side. Happily, for potential corporate raiders, there are more digestible morsels on the menu elsewhere.

One of the pandemic’s ironies is that telecom operators are struggling financially even as demand for their services soars. They face increased pressure to invest in fibre optic cables or super-fast 5G mobile networks, while regulators and competitors depress prices. Buyout interest has picked up: Spain’s MasMovil, France’s Altice Europe and Britain’s TalkTalk Telecom have all received offers.

A glance at the numbers explains why. At a 20% premium to Friday’s closing price, EQT could swallow KPN for just over 7 times this year’s expected EBITDA – below the 8 times average multiple at which it has traded in recent years. Assume revenue remains flat while margins improve slightly from 45% to 48%. If EQT cranked debt up to 5 times EBITDA, kept capital spending at around a quarter of revenue, used free cash flow to repay debt and sold out at the same multiple at which it bought in, it would double its 5.4 billion euro equity investment in five years, according to Breakingviews calculations. That’s a passable 15% internal rate of return.

Writing such a big equity cheque in the midst of a pandemic takes guts. The Dutch government, which can veto any takeover, adds another layer of risk. Such considerations would be even greater for BT. Though the UK operator’s shares have nearly halved this year, a buyout would still cost around 30 billion pounds including debt – before factoring in unclear pension liabilities.

Others present safer and arguably richer pickings. A 20% premium would allow financial buyers to gobble up Portugal’s Nos and Germany’s 1&1 Drillisch, Orange Belgium and local rival Telenet for 7 times this year’s EBITDA or less. Applying the same framework as for KPN, a buyout of Drillisch would earn its new owner 19% a year, while Orange Belgium would offer an even tastier return if its French parent agreed to sell. The trick will be ensuring buyers’ eyes don’t become bigger than their stomachs.


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