Tag Archives: KPN

Quick update KPN – Sold rights & stock

Today I sold, both the KPN Shares and the rights .

All in all, I got around 2,91 EUR (1.68 for the shares, 1.23 EUR for the rights) which results in a gain of ~ 11.5% before trading cost. Quite a nice outperformance against the AEX with ~ 3.5% in the same time period.

Nevertheless, this was clearly a “bumpy ride” as the chart for the rights shows:

The optimal timing would have been to buy on the second day of the trading period. I guess this was the result of the very short time period between announcement of the terms and the start of trading.

I heard that for instance US investors were completely taken by suprise and couldn’t actively trade the rights.

Main reason for selling was that I was not sure if I want to exercise the rights and I have some other, in my opinion better ideas in the pipeline. Also I am not really optimistic about KPN in the long term.

In general, those “deeply discounted rights issues” are interesting special situations for a short term trade but have to be handled with a lot of care and patience …

Edit:
Someone asked me why I don’t show annualized returns for my single portfolio stocks. In my opinion, annualized returns for single stocks are pretty meaningless. The KPN Trade would have been an annualised 280% but what does such a number say ? As my investment strategy includes a lot of “sleeping” stocks, I think that showing annualized returns on single stock level do not provide any benefit at least not for me. Much more interesting than an annualized return per stock is the potential gap between the current price and intrinsic value.

Short updates: Rhoen, KPN, HT1 Funding

A few short updates which i think are worth mentioning in a post:

Rhoen Klinikum

One of my “special situations”. My original thesis behind this was that it is a solid company with a lot of interested suitors. Just today, the Fresenius CEO stated in WSJ Germany that they are still interested.

So this is still a solid, uncorrelated speculation that something could happen any time.

KPN
As one part of their capital raising effort, KPN issued two Hybrid bonds last week, 1.1 bn EUR at 6.125% and 400 mn GBP at 6.875%. According to Bloomberg, both bonds seem to have a “change of control” clause, meaning the bonds have to be paid back if someone becomes majority shareholder of KPN. This is quite uncommon for hybrids and looks a little bit like a “poison pill” against Carlos Slim.

Additionally, I found that rating review from Fitch (via Reuters) quite interesting.

KPN is facing some headwinds in the Netherlands. A fourth entrant plans to set up a 4G network (Tele2) and there seems to be a potential 2 bn liability from a subsidiary called Reggefiber, where KPN currently seems to have a 41% share but will soon have the majority.

Commerzbank HT1 Bond

Commerzbank just released news that they plan to increase share capital by 2.5 bn EUR and paying back their silent participations. This is not so nice for shareholders, but very good for HT1 holders as more equity is now “below” the subordinated capital, reducing downside risk.

So not surprisingly, the price of the HT1 bonds increased significantly.

A few more thoughts on KPN (potential deeply discounted rights issue)

As discussed last week, KPN might become a potentially interesting “special situation” because of its announced massive equity raising.

In any case it makes sense to look a little bit deeper into KPN, even if it would be only a “short-term” special situation invest.

Relative valuation

let’s look at some standard valuation metrics:

Name P/B P/E Dvd Ind Yld EV/EBITDA T12M EV/MC
           
KONINKLIJKE KPN NV 1.88 6.47 3.81 3.80 3.79
DEUTSCHE TELEKOM AG-REG 1.46   8.04 4.28 2.22
BELGACOM SA 2.30 9.45 7.74 4.98 1.26
FRANCE TELECOM SA 0.76 5.63 17.49 3.81 2.60
BT GROUP PLC   9.78 3.26 5.02 1.41
VODAFONE GROUP PLC 1.23   5.67 8.20 1.34
TELIASONERA AB 1.72 9.51 6.56 7.28 1.35
PORTUGAL TELECOM SGPS SA-REG 1.55 17.25 15.71 5.43 3.23
SWISSCOM AG-REG 5.05 11.92 5.49 7.09 1.39
TELECOM ITALIA SPA 0.55   6.39 4.11 3.99
TELE2 AB-B SHS 2.20 13.92 6.91 5.95 1.34
TDC A/S 1.54 8.99 11.23 5.39 1.69
TELENOR ASA 2.53 41.85 4.20 5.65 1.20
TELEFONICA SA 2.19 7.37   5.29 2.41
ILIAD SA 5.04 42.03 0.27 11.09 1.14
TELEKOM AUSTRIA AG 2.53     3.75 2.39

KPN looks relatively cheap based on some metrics, especially P/E and EV/EBITDA. However we can also see that KPN is one of the TelCo companies with the highest debt loads. I used here´EV divided by market cap, but one could also use simple debt/equity ratios.

What is interesting to see is for me that despite the very weak performance of the sector, price/book is still relatively high for most of the companies. I think this is a result of the high dividends being paid by the TelCos which “eroded” book equity.

KPN history

In the case of KPN, things look a little bit different. If we look at this first set of numbers, dividends don’t’ seem to be the problem:

EPS DIV BOOK Value
31.12.2002 -3.94 #N/A N/A 1.83
31.12.2003 1.11 #N/A N/A 2.90
31.12.2004 0.72 0.16 2.69
30.12.2005 0.66 0.40 2.36
29.12.2006 0.79 0.48 2.19
31.12.2007 1.42 0.52 2.51
31.12.2008 0.77 0.56 2.18
31.12.2009 1.33 0.63 2.36
31.12.2010 1.15 0.73 2.23
30.12.2011 1.06 0.81 2.05

If we exclude 2003 (which contained the losses from the 3G licence excesses), KPN paid out only ~45% of its earnings as dividends. So what happened ?

This becomes clearer if we look at the next tabel, which shows free cash flow, net debt per share and outstanding shares:

FCF p. Share Net debt per share Shares outstanding
31.12.2002 1.17 4.99 2,491
31.12.2003 1.08 3.37 2,491
31.12.2004 0.91 2.90 2,410
30.12.2005 1.16 3.82 2,151
29.12.2006 1.31 4.32 2,036
31.12.2007 1.35 5.92 1,843
31.12.2008 1.21 6.32 1,714
31.12.2009 1.23 6.56 1,629
31.12.2010 1.54 7.45 1,573
30.12.2011 1.66 8.46 1,478

So we can easily see that until recently, KPN looked like the classical “anglo saxon style” shareholders dream: Fat free casflows used together with increasing debt to repurchase around 40% of their outstanding shares since 2003.

If you would take Charlie munger by his words, KPN should have been an excellent “Cannibal company”.

Looking at the stock chart, this seemed to help KPN to outperform for instance Deutsche Telekom for a long time, but now finally they both seem to have met at the bottom again:

So one lesson one can learn here is that being a “cannibal” company does not mean automatically that this will be a good investment. Based on a rough calculation, KPN had purchased around 10 bn EUR of its own shares between 2003 and 2011, nevertheless, the market cap of the company remained more or less constant over this period in time.

So looking back, this share repurchase looks rather like a debt financed liquidation than a value enhancing share buy back.

Debt profile

Having so much debt, it makes sense to look at the maturity profile of KPN.

Payments Principal Only
Year Amt(Mln)
2013 1,085
2014 1,400
2015 1,000
2016 1,250
2017 1,000
2019 1,046
2020 1,000
2021 1,250
2022 750
2024 700
2026 473

The table shows, that KPN has quite some debt to roll. So far they still have investment grade ratings (Baa2 from Moody’s, BBB- from S&P). Moody’s has them on negative outlook, S&P on stable.

The problem seems to be S&P. Despite having a BBB- rating on long term debt, S&P has them as “A-3” short term, which is the second worst rating available in the short term rating scale. This means effectively that KPN is shut out of short term financial markets as there are only a very small number if institutions permitted to buy such low grade paper. Even Telekom Italia still has an A-2 rating.

Especially the December S&P report clearly outlines some of the most important weaknesses of KPN. An interesting aspect is that one:

That said, the group is facing intense pressures on its domestic mobile revenues in particular, owing to the cannibalization of consumer revenues by IP-based instant messaging applications.

I have read that several times, that mobile carriers made most of their money with SMS. Now however, applications like “What’s App” are eating their lunch because they just use the internet flat fee, effectively eliminating the need to send SMS. As always, the established players were much to slow to react to this threat and I guess that now it is already to late.

KPN seemed to have identified this threat quite early and according to this article tried to increase fees for those services, but this actually resulted in a backlash called “net neutrality”. So The Netherlands and Chile are now the only 2 countries with full “net neutrality” which means the following:

The new law requires companies providing access to the Internet to treat all Internet services equally. They cannot favor their own services, nor charge extra to access a competitor’s service.

I guess this is one of the reasons why they earn higher margins in Germany as number 4 than as market leader in the Netherlands.

Another interesting point here:
If one reads the S&P anaylsis carefully, their major issue seems to be the 1.5 bn spectrum purchase which they think seems to be expensive. The big question here is:

Why does KPN target 4 bn as a capital increase although the rating agency problem seems to be a lot smaller ?

In my opnion, both the amount and the way to raise capital does not make sense. Why don’t they try to to the same as Telefonica and list a minority stake of their German business on the stock exhange ? With an EBITDA of almost 1.3 bn EUR of E-Plus in Germany, a 49% stake could easily raise 2-3 bn EUR on the basis of the Telefonica Dutschland valuation. This would be more than enough to resolve the rating issue and secure roll over of debt.

After being quite shareholder friendly over the last 8 years or so, suddenly, they don’t seem to care any more for shareholders. This is something which really worries me.

One explanation could of course be that they want to annoy or shake off Carlos Slim as large shareholder. In my opnion, this looks like the most likely reason why they behave in such a way. This howver would present exactly the short term opportunity I would be looking for. Management acting irrationally could open up an interesting sitauation, once the capital increase is being executed.

The other explanation would be that management sees a lot mor bad news coming and want to build up a cushion for big future losses. This would be bad.

Summary:

Honestly, I would not want to own KPN as a long term investment, however I will watch the situation carefully especially if they are going through with a deeply discounted issuance price. If the shareprice than will go down close to the discounted issuance price, there migth be a good “special situation” opportunity.

Deeply discounted rights issue watch: KPN NV (NL0000009082)

I had briefly covered deeply discounted rights issue as a potential “special situation” opportunity a couple of weeks ago.

Now, with KPN, we have an interesting non-financial candidate. This is what KPN issued today:

Dutch telecoms group KPN confirmed a €4bn rights issue to shore up its capital position after heavy expenses on bandwidth that have led to dividend cuts and lower profit margins.

The company announced the move along with its 2012 annual results, which showed a 3.5 per cent drop in revenues and a 12 per cent fall in earnings from the year before.

As one might expect, the stock tanked some 16% or so. Currently, at around 3.45 EUR per share, KPN has a market Cap of only 5 bn EUR, so raising 4 bn via a rights issue might require a large discount on potential new shares.

The “wild card” in this game will be Mexican Billionaire Carlos Slim who owns currently 27.5% of the company. If he fully participates as lead investor and even taking up more than his share, then the “forced selling” aspect might not be too relevant.

If for some reason, he would refuse to participate, the situation will become very interesting.

Just for fun, let’s look how the performance was for Unicredit. I would distinguish the following events / time periods:

– 4 weeks before announcement
– announcement day
– period between announcement and price setting (for new shares)
– price setting day
– period between price setting and start trading of subscription rights
– trading period
– 4 weeks after end of trading period

First the relevant dates:

Unicredit
Announcement first trade date 14.11.2011
Price setting of rights issue 04.01.2012
First trade date subscr. rights 09.01.2012
Subscription trading until 01.02.2012
 
Discount 43%
New share 2 new for 1 old

Now the relative performance:

Performance UCG MIB Relative
– 4 weeks before announcement -18.35% -4.98% -13.37%
– Date of announcement -6.18% -1.99% -4.19%
– announcement until price setting -14.40% 2.95% -17.35%
– day of price setting -17.27% -3.65% -13.62%
– price setting to start trading -26.46% -4.45% -22.01%
– trading period 73.75% 12.94% 60.81%
– 4 weeks after trading period 0.05% 2.82% -2.77%
– 6 months after trading period -32.25% -11.39% -20.86%
– 12 months after trading period 12.53% 9.53% 3.00%

In the Unicredit example, clearly the period where the subscription rights were traded showed the best relative performance of the shares. Interestingly, on the announcement day, the price drop was much less in percentage points than KPN. This might have to do with the short selling ban which was in place (at least to my knowledge) when Unicredit announced the rights issue.

Again for fun, a quick look at Banco Popular’s rights issue from the end of last year.

Again the dates first:

POP
Announcement first trade date 01.10.2012
Price setting of rights issue 10.11.2012
First trade date subscr. rights 14.11.2012
Subscription trading until 28.11.2012
 
   
New share 3 new for 1 old

and then relative performance to the IBEX:

Performance POP IBEX Relative
– 4 weeks before announcement -3.95% 5.11% -9.06%
– Date of announcement -6.17% 0.98% -7.15%
– announcement until price setting -29.95% -1.71% -28.24%
– day of price setting 4.56% -0.90% 5.46%
– price setting to start trading -8.86% 1.39% -10.25%
– trading period 8.12% 2.16% 5.96%
– 4 weeks after trading period -6.71% 3.74% -10.45%

One can see a similar pattern first, with the stock losing 4 weeks before announcement, as well as on the announcement date until the final price setting. However of the date of price setting, the stock jumped, until loosing only a little bit until starting of the trading period.

Then however, the gains within this period were relatively low compared to Unicredit. Overall it looks a lot less volatile than Unicredit, so maybe less forced selling here.

Back to KPN:

Other than Unicredit and Banco Popular, KPN had outperformed the AEX almost +11% in the last 4 weeks, so today’s large drop might compensate for this (unjustified) outperformance.

If the other two stocks are any guide, one could still expect lower prices until the price for the new shares will be set.

The stock price of KPN look really really ugly long term:

But make no mistake, any company which needs to go into deeply discounted rights issues is in trouble. This is “distressed” territory.

(…to be continued….)