Swedish Raider Might Nab Europe’s Last Telecoms Jewel

(Bloomberg Opinion) -- Could Swedish private equity firm EQT AB succeed where billionaire Carlos Slim failed and push through an acquisition of Dutch carrier Royal KPN NV? The telecoms industry’s depressed valuations certainly make it look feasible.

EQT is exploring a bid for KPN, Bloomberg News reported on Friday. The shares jumped as much as 9.8% on Monday, valuing the group at 10 billion euros ($12 billion). Earlier interest from Canadian infrastructure fund Brookfield Asset Management Inc. and a handful of Dutch pension funds failed to produce a concrete bid last year, and America Movil SAB, which is controlled by Slim, had an offer rebuffed back in 2013. The Mexican telecoms operator still has a 16% stake in KPN.

Telecoms stocks have been the worst-performing sector in Europe over the past decade apart from banks, prompting executives to seek other ways to generate returns for shareholders. Operators across the region — such as Vodafone Group Plc. in the U.K., Telefonica SA in Spain, Altice Europe NV in France and Portugal and plenty more besides — have started selling stakes in their network assets, which can command enterprise valuations approaching 20 times Ebitda, a profit measure.

That’s often more than twice or three times the valuation multiple of the parent company. Infrastructure funds in particular are hungry for the predictable returns that networks can enjoy when decoupled from their consumer-facing businesses.

The pattern has prompted a flurry of deal-making activity, not just from funds investing in the infrastructure assets, but from activists pushing telecoms operators to consider such divestments. The likes of Deutsche Telekom AG, Orange SA and Proximus SADP have been able to resist the trend largely because the German, French and Belgian states respectively retain significant holdings in each firm.

Macquarie’s $10 billion acquisition of Denmark’s TDC A/S in 2018 may be instructive for EQT. The Australian fund is separating TDC’s consumer business from the networks. It can then lease network capacity both to the new standalone consumer company, which it may sell, and other third-party operators. It’s a playbook you can well imagine EQT following.

KPN is one of the few operators that has neither a significant state investor nor has it monetized its networks in this way. That makes it an appealing acquisition target, which is one reason why it was trading at more than 18 times its expected earnings before Friday’s report, higher than the 13 times average of its European peers. Even so, the shares are trading near their lowest levels as a multiple of earnings since 2013.

Although the virus might have created some near-term headwinds, the company’s prospects are fundamentally unchanged in the long term, creating an opportunity for a bidder such as EQT. Last year, UBS analyst Polo Tang estimated that a leveraged buyout of KPN at 3.50 euros per share could generate annual returns of 10%. The stock’s average price over the past 50 days was just 2.16 euros, creating an opportunity for even more upside, even if it doesn’t separate its consumer and network operations.

What’s more, EQT may be able to avoid a nationalistic or protectionist backlash given it is based in the European Union and says it’s committed to a long-term, sustainable approach to ownership. A bid of between 2.70 euros and 2.75 euros, which Bloomberg Intelligence analyst Erhan Gurses sees as realistic, would value KPN at 18 billion euros including debt. It would certainly be ambitious, but now might just be the time to pull it off.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

©2020 Bloomberg L.P.