KPN to Take $10.86 Billion Write-Down, The Latest in a String of Telecom Firms
By ALMAR LATOUR, DAN BILEFSKY AND TOBY STERLING
Staff Reporters of THE WALL STREET JOURNAL
Debt-saddled telecommunications operator KPN NV said it would take a 12.4 billion euro ($10.86 billion) goodwill write-down on mobile unit E-Plus, a move that will erode the Dutch company's earnings.
The decision comes as European telecommunications companies, hit by greatly diminished growth expectations, move to write down acquisitions of costly third-generation, or 3G, mobile licenses and technology. Telecom write-downs have been announced by Vodafone Group PLC, Vivendi Universal SA and Telefonica SA as well as by a U.S. company, WorldCom Inc. KPN acquired the German mobile unit in 1999.
"The industry is clearing the decks," says Ben Tompkins, managing director of investment bank Broadview International in London. "They are resetting expectations."
More write-downs are likely: France Telecom SA's chief executive officer, Michel Bon, said earlier this week that write-downs are possible for some of the acquisitions the company made in recent years, including stakes in mobile operator MobilCom AG of Germany and cable operator NTL Inc. of the United Kingdom.
Some operators, however, are holding out for regulatory changes that would allow them to trade 3G licenses. In some quarters, there are cautious hopes the industry will see a slight recovery when new technologies roll out this year and next.
While some analysts dismiss write-downs as mere accounting procedures, which lag behind stock-market movements, others argue they offer insights into the future performance of companies. In fact, write-downs signal that the value of an asset is no longer what it used to be and that the asset won't deliver the cash flow once projected, thereby possibly dealing a blow to the cash flow of the entire company.
In this hard-hit industry, write-downs can be particularly painful: Acquisitions were often paid for through debt. Large companies such as France Telecom and Deutsche Telekom AG have debt burdens of, respectively, 160% and 100% of their market capitalization. KPN, despite recent debt-slashing measures still has a debt of 156% of its market capitalization.
"In a way, write-downs make the cost of debt much heavier," says Rick Deutsch, head of European telecom credit research at BNP Paribas. If the value of an asset bought with debt declines while the debt stays level, he explains, the debt weighs the company down even more heavily.
KPN had previously indicated its write-down would cut its bottom line by between nine billion euros and 11 billion euros. But the number had increased due to KPN's recent decision to acquire the 22.5% of E-Plus that it didn't own from BellSouth Corp. Japan's NTT DoCoMo Inc., which owns 15% of KPN Mobile, will take a one billion euro chunk of the total 13.7 billion euro write-down.
Investors, anticipating a large number, didn't punish KPN's already battered share price. KPN's shares edged up one cent to 5.35 euros on the Amsterdam Stock Exchange. The shares have plummeted 92% since March 2000 when they reached a high of 70 euros at the height of the telecom boom.
The write-down illustrates the extent to which soaring telecom valuations have been brought low since KPN paid 18.7 billion euros for 77.5% of the German cellphone operator in 1999. Back then, KPN was willing to pay a hefty price to establish a foothold in Europe's biggest telecom market. But the acquisition of E-Plus gave KPN only a 13% market share. Ever since, it has failed to gain on bigger competitors owned by Deutche Telekom and Vodafone Group, which together account for about 80% of Germany's mobile-phone market. All together, six operators, which paid a total of 51 billion euros for 3G mobile-phone licenses, are competing in the market.
KPN has debt of 16 billion euros, which it accumuluated following a string of acquisitions and the purchase of new wireless licenses in Germany and the Netherlands. It isn't the only European operator with expansion-related problems, but the debt weighs heavily on KPN, which is one of the smallest established European operators. E-Plus accounts for the bulk of KPN's total debt, and industry analysts have repeatedly called on KPN to sell the unit to shrink its debt load.
KPN said it has no plans to sell E-Plus, in part because it doesn't believe it would find a buyer amid this industry downturn.
Write to Almar Latour at almar.latour@wsj.com, Dan Bilefsky at dan.bilefsky@wsj.com, and Toby Sterling at toby.sterling@dowjones.com
Updated March 15, 2002 |
