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KPN has been ringing the changes since its bid for UK mobile telecoms company mmO2 was rejected in February. The Dutch telecoms incumbent has started a charm offensive with investors, launched a e500 million share buyback, and is parting company with its finance director. But is KPN moving on after the disappointment of a spurned bid? Or is it laying the groundwork for another assault on mmO2?
The intentions of KPN chief executive Ad Scheepbouwer aren't easy to gauge. He has made no secret of his belief that scale matters in mobile. But he is anxious to convey the impression that he won't overpay for mmO2. KPN's share price fell after news of its bid leaked.
Scheepbouwer is now in an awkward position. Even if the steps he takes are sensible in their own right, they might invite suspicion that he is trying to boost his share price for another bid. The share buyback is an obvious example.
Nor will the departure of finance director Maarten Henderson dampen speculation that KPN wants another pop at mmO2. Many shareholders thought the first bid should have been financed with more cash and fewer shares. After all, KPN shares looked undervalued. And the merged company would have been undergeared.
Henderson is thought to have been instrumental in this conservative financing. He was at KPN throughout its financial crisis in 2000, while Scheepbouwer only joined in its later stages. That said, Henderson is staying on until the end of the year, which hardly suggests he is being eased out in a hurry.
For Scheepbouwer, the mmO2 deal was a unique opportunity to participate in a future consolidation of Europe's mobile industry.
Scheepbouwer believes there are benefits to be had from owning mobile networks across the continent. Operators developing new data services should be better off spreading the cost over a large number of subscribers. And it should be easier for a company to negotiate decent roaming rates if it has a big base of customers to offer in return.
Scale benefits unproved
The snag is that these benefits are not yet proved. The financial returns of Europe's leading mobile operator, Vodafone, for instance, are not yet superior to those of large single-country operators. Perhaps they will be over time or perhaps the cost of achieving the synergies will outweigh the benefits.
But a deal with mmO2 would buy Scheepbouwer time for investors to come around to his view. Both companies have German mobile networks that offer obvious cost savings in a merger. Investors would have supported the deal if it was financed appropriately. And later, the benefits of owning mobile operations in the UK, Germany and the Netherlands might have become apparent.
But what alternatives does Scheepbouwer have? He cannot buy any mobile businesses outside Germany because his shareholders will only back in-market mergers for now. By the same token, it would be hard for him to sell his business. The Netherlands isn't a strategically significant territory. And despite the market's limited size, five players in mobile make it fiercely competitive. One day, if pan-European synergies are proved, France Telecom or Deutsche Telekom might sniff around this asset.
That's not all. KPN is dominated by its Dutch fixed-line operations, which contribute more than half its enterprise value. And they are being clobbered by a fall in termination revenues from mobile operators, imposed by regulatory fiat.
Where does this leave Scheepbouwer? He could just manage the business for cash. But if he wants to get the share price up, he will have to return most of the cash to shareholders. This would not be very interesting for him, even if his big share-option package could make it rewarding. Surely Scheepbouwer, who oversaw 42 mergers in his last job at the Dutch post office, will be tempted to get back into the merger game if he can.
He has essentially two options. One is to keep a cool head – and hope his undervalued shares rise as investors realize he is not going to do anything silly. The other is to pay a "strategic" premium for mmO2. This might destroy value but would keep him in the mergers game for the long run.
Scheepbouwer is on a charm offensive, telling investors he will choose the former option. He is an experienced dealmaker who casts a wary eye over synergies, or so the spin goes.
The more he brings the market around to this view, the more exposed mmO2's share price will look. It hasn't moved far from the 105p to110p level where KPN is thought to have bid. But several weeks have passed since the Brits walked away from the deal. And they have yet to smoke out interest from elsewhere.
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