Carlos Slim is paying up to establish a foothold in Europe. The world’s richest man is offering about €2.6-billion ($3.4-billion) to lift his stake in KPN, the ailing Dutch telecom operator, to 28 per cent from his current 4.8 per cent. America Movil, the Mexican tycoon’s telephone company, is swooping after KPN shares wilted. But there are good reasons why the target’s stock looks cheap.
At €8 a share, the stake-building would amount to a 23.5-per-cent premium to KPN’s previous closing price. That’s the best news KPN investors have had in a while: Total shareholder returns have been a negative 33 per cent in the past 12 months. And earlier this year Eelco Blok, the new chief executive, was forced to ditch share buybacks and forward dividend guidance.
But it’s hard to fathom what Mr. Slim is up to. At the last close, the stock traded at an enterprise value of 4.3 times EBITDA. That hardly looks expensive at first glance. But in fact that multiple is in line with valuations across Europe’s depressed telecom sector.
KPN was once lauded for showering investors with cash, like some of its competitors. Now it is facing a big investment bill to ensure its networks can meet the demands of data-hungry smartphones and tablets. To make things worse, online rivals have eaten into voice and text revenue – and a new entrant could yet make things trickier in the company’s domestic mobile market.
America Movil’s finance chief says the bigger stake will help it take a “closer look at the action in Europe.” This would amount to pretty expensive market analysis. But perhaps Mr. Slim feels that board representation would help him steer a KPN turnaround.
Mr. Slim’s manoeuvring may also have a Latin American angle. KPN is retreating from international markets but is stuck with a German unit, which might be too large for private equity buyers with a value of about €6-billion. One frequently discussed solution is a tie-up with the local arm of Telefonica. The debt-laden Spanish operator cannot afford a buyout, but could perhaps offload Latin American units to Mr. Slim. At the very least the Mexican businessman will have a seat at the table when and if the deal happens.