MAKOR DEAL PREVIEW
On 31 January, Brookfield confirmed that it was in talks with Dutch Pension funds (PGGM & APG Groep) regarding a potential bid for Dutch Telekom KPN. If at this stage there is no certainty that a formal offer will be made, we take a closer look at the situation that is clearly similar to the offer made by MacQuarie in 2017 on TDC.
Brookfield is an infrastructure fund managing over $330Bn and like MacQuarie in 2017 has approached 2 KPN’s Pension funds to get them on board in the SPV and therefore avoiding any potential political concerns. Mr C.Slim, through America Movil, launched an hostile offer on KPN in 2013 at EUR2.4 that was rebuffed by the Board of KPN and the Foundation threatening to exercise the right to issue new shares (50% more) to fend off this hostile offer.
If the situation has not change regarding this right, we believe that tabling a fair offer, teaming with Pension funds to guarantee employees right and also being committed to CAPEX levels required by the Dutch Authority would definitely make sense for Brookfield to launch an offer.
MAKOR COMMENTS
Dutch telecom market has experienced consolidation in 2018 (DT acquiring Tele2 AB business in Netherland approved in Phase 1 by the EC) resulting in a 4 to 3 competitors market and therefore making the price stabilization a key theme on the market. When Macquarie acquired TDC in 2017, it moved TDC leverage from x2.2 EV/ EBITDA 18e to x5.9 with the purpose later on to split the company in 2 parts (infrastructure and client business).
We take the following assumptions based on our experience in TDC:
- A 30/70 Debt to Equity Ratio
- Debt is launched in USD & EUR with Interest rates at 3.75% and 5.75%
- EBITDA Margin of 41%-42% over the next 5 years.
- Exit multiple of x8.5 EV/EBITDA
- IRR for Equity Holders of 20% with a bid price at EUR3.1
- Please see below our Credit metrics and IRR Sensitivity :
Credit ratios
2019
2020
2021
2022
2023
2024
2025
Net debt/EBITDA (X)
5.5
5.2
4.8
4.4
4.1
3.81
1.91
Net interest
488.1
468.8
443.9
408.7
373.6
338.5
169.2
EBITDA/net interest
4.8
5.0
5.2
5.8
6.5
7.2
14.6
EBIT/net interest
(EBITDA-CAPEX)/interest
2.5
2.6
2.9
3.0
3.4
3.8
7.6
IRR for equity holders
20%
Sources: Makor Securities
IRR SENSITIVITY
Bid Price
2.9
2.95
3
3.1
3.25
Equity/Debt
20/80
27%
27%
26%
25%
24%
30/70
22%
21%
21%
20%
19%
40/60
18%
18%
17%
17%
16%
50/50
15%
15%
15%
14%
13%
60/40
13%
13%
13%
12%
12%
70/30
12%
12%
11%
11%
10%
Sources: Makor Securities
MAKOR CONCLUSION
KPN is trading around EUR2.69/2.7 and an offer at EUR3.1 would represent a premium of 15% (23% from KPN’s last price before the announcement). This represent a nice risk/reward for investors taking also into account the EUR0.12 dividend announced on 30 January.
Full LBO model available upon request.
Henri DUMENY
Senior Event Driven Analyst
Makor Securities London Ltd
7 Savile Row
London
W1S 3PE
United kingdom
MAKOR 1ST VIEW: KPN / BROOKFIELD AM