``It will never go bankrupt. It would be re-nationalised before that.''
Bruised KPN investors braced for cash call
By Kirstin Ridley and Jana Sanchez
LONDON/AMSTERDAM, June 5 (Reuters) - Institutional investors in beleaguered Dutch group KPN Telecom said on Tuesday they were braced for a 5.5 billion euro ($4.65 billion) cash call, but would demand a ``credible'' strategy in return.
KPN, whose shares have plunged nearly 90 percent since last March, is haemorrhaging cash and struggling to sell assets to cut 23.3 billion euros of debt. After an over-ambitious expansion strategy, investors are calling for heads to roll.
As KPN's stock dropped another nine percent to 8.10 euros on Tuesday morning, industry experts said they expected any cash call to offer new shares at about six to seven euros per share.
``I think there's a massive credibility issue with management now,'' said one London-based KPN investor. ``If they do have to go ahead with this rights issue, and if they continue to struggle the way we are then yes, you would want a change of management.''
Three weeks after heavy debts forced British Telecommunications (quote from Yahoo! UK & Ireland: BT.L) to tap investors for a record 5.9 billion pounds ($8.4 billion), KPN said on Friday it was considering going cap-in-hand to shareholders after a spending spree on overseas assets and new-generation mobile licences was compounded by a global downturn in stock markets.
But a rights issue only makes sense if it succeeds. British stockbrokers have advised BT's 1.8 million small shareholders against buying into the BT rights issue, even though it was priced at a hefty 47 percent discount to the share price.
``Whether we participate will depend on the size of issue, strike price and the KPN management story,'' said Peter Bekius, fund manager at Kempen Portfolio Managers. "The management has to come up with a truly credible story about how to go forward.
``We're hearing the discount will likely be 50 percent, but... if it's 50 percent of the price over the last 30 days, it could still be too high.''
Peter Paul de Vries, head of the Dutch VEB (Vereniging van Effectenbezitters) retail shareholders lobby, said he thought it unwise to price any issue too far below the current share price. But he added: ``If it's really low, you are forced to buy it.''
EYES ON DUTCH STATE, BELLSOUTH
KPN and BT look set to be the first European telecoms groups to tap shareholders after the industry took what has been dubbed a 300 billion euro gamble on licences and networks for untested, high-speed, third-generation (3G) mobile phone services.
The industry has spent 120 billion euros on 3G licences in the hope that revenues from speedy new mobile Internet services would replace slowing cellphone sales growth. But software glitches are delaying the launch of new services.
Unlike its larger peer BT, KPN remains 35 percent state-held -- and it is crucial that the Dutch government takes up any rights to buy new shares if the group opts for a rights issue to avoid a massive stock overhang.
The ministry, however, remains tight-lipped -- possibly wary of being accused of unfair state support. But fund managers expect the Finance Ministry to back any cash call, which is forecast to be discounted by around 50 percent.
``There's always a price at which KPN would be a good investment,'' said one Amsterdam-based fund manager. ``It will never go bankrupt. It would be re-nationalised before that.''
Another unknown is BellSouth Corp (NYSE:BLS - news), the U.S. telecoms group. The company has the option from June 9 to convert a 22.5 percent stake in E-Plus, a German joint venture with KPN, into either KPN, KPN's unlisted cellphone unit KPN Mobile -- or demand a cash buy-out.
``If there weren't any funny shareholder structures, this would probably just about make sense, notwithstanding the caveat that you were throwing good money after bad into Germany,'' noted another London-based fund manager.
CRIPPLING GERMAN COSTS
Hefty 3G costs mean the main culprit behind KPN's debts is its cellphone arm KPN Mobile -- which controls the third-biggest mobile phone operator in Europe's biggest, most competitive and most expensive telecoms market: Germany.
Some investors say it is time KPN Mobile, which its parent says may still be listed this year -- if bruised investor sentiment should turn in a sector that has seen shares drop by two-thirds since last March -- is spun off.
``The mobile side of all these companies needs to be spun out so that they can get on and rationalise and do the deals that are required in terms of capital expenditure sharing,'' noted one former London-based KPN investor, who recently sold the stake.
Under pressure from the four smallest of Germany's six mobile phone operators, the telecoms regulator on Tuesday confirmed it would allow companies to share parts of new mobile (UMTS) networks to help ease their cost burden.
But this alone is unlikely to help KPN's joint E-Plus venture. Although the regulator demands that Germany should have six rivals, some analysts and investors say only E-Plus, or KPN Mobile, are likely to see a change of control.
Orange , the cellphone group controlled by France Telecom , held bid talks with E-Plus two years ago and has recently been linked to the group again. Others tip Telecom Italia Mobile as a possible bidder for KPN Mobile.
``I think KPN Mobile, in theory, is KPN's get-out clause,'' said another KPN investor. ``Ideally, they want someone like TIM to be prepared to bid for KPN Mobile. The issue is: what are you left with? Whichever way you look at it, it's tough for KPN.'' |
