Confusion surrounds KPN cash call
9 February to 15 February 2013 | By Robert Venes, Josie Cox
Dutch telecoms outfit may combine capital instruments but shareholder intentions still unclear
Dutch telecoms group KPN saw more than 20% knocked off its market cap last week when it announced plans for a €4bn capital increase to offset spiralling debt levels. The target was much larger than expected and the announcement left unanswered key questions about the structural composition of the transaction, the length of time underwriting banks will be on risk and the intentions of key shareholders.
The company’s shares fell 15.85% to €3.45 by Tuesday’s close, after it announced its full-year 2012 results alongside the plans for the €4bn rights issue. The shares continued to tumble and closed at €3.152 on Thursday, a 23.13% fall across the week that cut KPN’s market cap to €4.51bn from €5.869bn on Monday.
KPN’s debt increased to €12bn in the fourth quarter of last year, in part because of the payment of €1.352bn for 4G telecoms licences in an auction last month – much more than some analysts had expected. By the end of 2012, KPN’s net debt was three times Ebitda: the €4bn fundraising will lower that ratio by 0.9, in line with the company’s aim to get it down to 2.0–2.5 by the end of 2013.
KPN was downgraded last week by S&P to BBB–, while its Baa2 rating from Moody’s is on review for downgrade. Fitch rates the company at BBB– with a stable outlook.
There will now be a long wait – during which underwriters are exposed – as shareholders will not vote on the fundraising until March 19
Investors clearly want KPN to provide some assurance that debt concerns will be dealt with and that its investment-grade rating will be maintained, but there was considerable surprise among ECM bankers away from the deal that details on the financing were so lacking.
Goldman Sachs and JP Morgan are committed between them to a €4bn underwrite against shares with no par value. Rothschild is advising KPN, with ABN AMRO as financial adviser to the company’s supervisory board.
If it does, it would significantly decrease the banks’ ability to set a discount to TERP that provides comfort and some insurance that they will not end up becoming major shareholders. Any pushback from the banks, on the other hand, would require more onerous and dilutive terms for shareholders.
Shareholder silence
Bankers away from the deal were also stunned to see there was no guidance on whether 27.47%-shareholder America Movil would take up its rights, nor news about the intentions of 9.6%-shareholder Capital World.
A £2.08bn rights issue to part-finance the merger of G4S and ISS in late 2011 collapsed after shareholders publicly came out against the trade and its financing. Underwriters were accused at the time of putting too much emphasis on offloading their risk instead of ensuring the deal had shareholder support.
Adding to the confusion was KPN’s suggestion that part of the €4bn capital raising may come through equity-linked or other capital instruments.
A convertible bond or even a mandatory convertible bond would diversify the range of investors being tapped for funds, but it is unlikely that the company could raise a large proportion of overall funding via that route. There would also be concerns that the market has already priced in a €4bn rights issue, limiting the room to manoeuvre on terms for a convertible bond.
Bond strategists suggest KPN may also test the hybrid bond market, boosting liquidity while not upsetting its debt-to-equity balance adversely.
Hybrids have had a stellar start to the year, with Telekom Austria, EDF and Veolia all taking advantage of investors’ swelling appetite for the products. They offer significantly higher returns than senior paper, and some strategists say they are currently still very cheap on a risk-reward basis.
The coupons offered by hybrids are still substantially below the cost of dividend yields, making them attractive for corporates. Issuers also value them for their non-dilutive nature, which means that they can boost return-on-equity and earnings-per-share metrics.