EQT, Stonepeak Prepare for Long Haul After KPN Rebuffs Approach

EQT AB always knew a takeover of former Dutch telecom monopoly Royal KPN NV would be a sensitive affair.

So when the Nordic buyout firm started working on the idea more than half a year ago, the goal was to slowly win over KPN management to a friendly deal by pledging billions in long-term infrastructure investments.

Top officials from EQT and its partner Stonepeak Infrastructure Partners flew to the Netherlands to make exactly that pitch in mid-April at a secret meeting with KPN Chief Executive Officer Joost Farwerck, according to people familiar with the talks. They offered to deploy an additional 4 billion euros ($4.8 billion) in KPN’s network expansion over the next few years, on top of the Dutch company’s planned spending of more than 1 billion euros annually.

The pair stressed their long-term view on infrastructure investments, with a decade-plus time horizon, to ease concerns about a quick-flip private equity deal. EQT also pitched the benefits of combining KPN with Delta Fiber, the high-speed internet provider that the buyout firm already owns in the Netherlands, the people said.

They signaled that a potential offer could be upwards of 3 euros per share, representing more than a 30% premium over KPN’s closing price of 2.235 euros on Oct. 9, the last trading day before Bloomberg News initially reported EQT’s interest.

EQT and Stonepeak walked out of that April meeting feeling good about the conversation, hopeful of further progress in a long courting exercise, the people said.

Next Move

About two weeks later, that optimism was dashed. KPN announced that it had rejected an “unsolicited high-level approach” from EQT and Stonepeak, saying the “proposition did not include an offer price.” KPN also revealed a never-reported approach from KKR & Co. After a careful review, KPN’s management and supervisory boards concluded the approaches didn’t provide tangible added value to KPN’s existing strategy, it said.

KPN’s statement, spurred by a Financial Times report on the rejection, was the first time it had acknowledged any interest after months of news flow from Bloomberg, the Wall Street Journal and blogs. Management can “well justify” rejecting any bid shy of 3.70 euros per share, Berenberg analyst Usman Ghazi wrote in a note.

The rebuttal has left EQT and Stonepeak to regroup and consider their next move -- and has suitors and investors wondering whether KPN is absolutely opposed to a buyout or just pushing for a higher price. The buyout consortium still sees strategic rationale in a deal and would be willing to discuss a price above what was previously floated, the people said.

Getting KPN’s blessing will be key if the suitors want to avoid a takeover defense known as a stichting, a foundation set up to represent the interests of the company and its stakeholders.

“KPN boards have no intention for KPN to be sold, at the very least for now,” ING Groep NV analyst David Vagman wrote in a research note this week. “This is key, as only a friendly bid can succeed given KPN’s impregnable anti-takeover defenses.”

The consortium will also have to navigate political sensitivities in the Netherlands, where the government is able to block telecom deals deemed to endanger national security or the public interest. A complex process to form a new coalition government is ongoing in the country after general elections in March.

Long Game

Rival suitor KKR, for its part, looks less hopeful. The private equity firm has all but dropped its pursuit of KPN for now given the company’s clear opposition to a deal, people with knowledge of the matter said.

KKR has also been busy with a different deal in the Dutch telecom sector. It announced in April it’s setting up a joint venture to deploy fiber networks across urban areas in the Netherlands. The newly-formed company plans to spend 700 million euros rolling out the infrastructure, which will be leased to operators including Deutsche Telekom AG’s local wireless unit.

All this interest indicates that the value of telecom infrastructure is gaining more attention. KPN’s fiber network alone could be worth nearly 13 billion euros including debt, or about 1,700 euros per line, according to KBC Group NV.

Representatives for EQT, Stonepeak, KKR and KPN declined to comment.

The commentary from KPN so far doesn’t rule out the company being receptive to a higher bid, UBS Group AG analyst Polo Tang wrote in a May 3 research note. KPN’s risk/reward profile is attractive for investors: it has strong fundamentals, with revenue set to grow again by the end of the year, and its stock is pricing in only a moderate probability of a deal, Tang said.

KPN management might decide it makes sense to play the long game, given telecom stocks look undervalued, according to ING’s Vagman. KPN operates in a benign regulatory environment, and its fiber-to-the-home investments will eventually pay off, he wrote.

“The stock market has been harsh on telecom stocks, despite their very high resilience to the crisis,” Vagman said. “Private equity has seen this as an opportunity.”

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