KPN's debt-cutting solution could be a new share issue

Reuters News
Posted: Jan 31, 2013 5:59 AM
KPN's debt-cutting solution could be a new share issue

BRUSSELS (Reuters) - Dutch telecoms group KPN is widely expected to announce steps to cut debt when announcing full-year results next week, with some analysts bracing for a share issue.

KPN, which will report 2012 results on February 5, breached its own debt target of 2.0-2.5 times debt to core profit (EBITDA) in the second quarter. The ratio hit 2.7 in the third quarter.

Although it sold off assets, notably Dutch and German mobile phone towers, KPN had to pay an above-forecast 1.35 billion euros ($1.83 billion) at a mobile frequency auction which finished in December.

As a response, the group, in which Mexican billionaire Carlos Slim's America Movil took a near 28 percent stake in 2012, cut its dividend for 2013 to 0.03 euros per share from a previous guidance of 0.35 euros.

Analysts believe that will not be enough.

"We estimate that KPN may need to strengthen its balance sheet by up to 2 billion euros to remain on the safe side, which means a significant risk of share dilution," Rabobank analyst Frank Claassen wrote in a note to clients.

Issuing new shares is not an attractive proposition to shareholders given KPN's share price has plummeted by almost 50 percent over the past year.

A large-scale rights issue would also require backing from KPN's shareholders, including Slim, who controls America Movil.

KPN could avoid a rights issue if it follows in the steps of Telekom Austria, also partially owned by Slim's America Movil, which last week issued a 600 million euro hybrid bond to address its debt.

Companies generally have to pay higher interest on hybrid bonds, but credit rating agencies treat them as partially helping to improve debt ratios.

KPN is currently ranked one notch above the lowest investment grade rating by Moody's and Standard & Poor's who also have a negative outlook on KPN's debt.

Fitch has already cut its credit rating to "BBB-", the lowest rating at which many pension and investment funds are allowed to invest in the group's bonds.

Nomura wrote that KPN still had access to debt markets, but not addressing its debt problems could leave it a forced seller of assets in future.

Analysts say KPN will not find much solace in its 2012 results after an 11 percent decline in core profit in the first nine months of the year due to regulatory caps on mobile tariffs and Dutch users shifting to online messaging applications.

"I think the Dutch market is just exceedingly difficult," said Bernstein analyst Robin Bienenstock.

Competition will remain an issue in the Netherlands with the imminent entry of a fourth mobile operator, Sweden's low-cost Tele2.

KPN's German mobile unit E-Plus, traditionally a source of growth, has also seen slower revenue expansion and falling profit margins due to competition and new tariffs.

KPN is expected to report a core profit of 4.68 billion euros, according to StarMine data, a decrease of 11.7 percent compared to 2011.

(Reporting by Robert-Jan Bartunek; Editing by Louise Ireland and Philip Blenkinsop)