KPN's MVNO Plan Offers Potential Growth - Report
While most large European network-based telecom operators have to date avoided launching mobile virtual network operators ("MVNOs") in foreign markets, some incumbent operators are now considering such ventures.
The most advanced in the process is undoubtedly Netherlands-based Royal KPN, announcing this week that it has entered negotiations with the mobile operators in Spain with a view to using their networks.
"Operating only in the mature and regulated Western European markets, the key challenge for KPN is to find new areas of growth" says Frederic Beaumelou, Associate Director in Fitch's TMT group in London. "In spite of the business risks inherent to setting up a greenfield business, the selective launch of MVNO should not negatively affect the rating because of the scalability of costs involved".
Moreover, Fitch says that it believes that entering less competitive markets could prove to be a more economical growth strategy than acquisitions.
Though KPN could carry out approximately EUR3bn of acquisitions without breaching the 2.5x net debt to EBITDA maximum ratio stated in its financial policy, the potential targets have become scarce and those remaining have reached increasingly high valuations, driven by interest from the private equity groups.
Although launching an MVNO offers growth opportunities with low start-up costs, Fitch recognises that such a venture also presents business risks such as distribution, marketing policy and above all the conditions and costs for leasing network capacity.
For the virtual operator to be profitable, the level of rented capacity must be variable and depend only on usage by consumers. Moreover, the discount to retail price, which determines network costs, must be sufficient to cover operating expenses and allow for a return on investment. While the planned entry into the Spanish mobile market addresses KPN's need to find new growth areas, Fitch notes that the success of this venture hinges on a flexible leasing capacity agreement and efficient distribution and marketing policies for this business to become profitable.
Although KPN does not yet run any virtual operator, Fitch believes it will benefit from the solid experience it has gained in this area. In the already penetrated markets of Germany and Belgium, KPN has developed its mobile subsidiaries, E-Plus and Base, through the launches of own brands and third party MVNOs (eg Medion mobile), targeted at cost-conscious consumers (eg Simyo) and individual segments (eg Ay Yildiz). In Germany, its brands other than E-Plus and its partners' MVNOs accounted for more than 34% of its customer base of 12.7 million at end 2006.
Since none of these offer handset subsidies, E-Plus recorded strong profit growth last year as EBITDA improved by 34%, representing 31.3% of revenue of EUR2.9bn.
In Fitch's view, the most attractive countries would be the relatively expensive or underpenetrated markets of southern Europe where MVNOs have not yet been launched or remain small.
In France, mobile penetration stood at only 80.8% at end-2006 and MVNO had captured a market share of only 2.8%. In spite of a very high mobile penetration estimated at 133% in Italy, there is as yet no obligation for the operators to open their networks to MVNOs. Thanks to the absence of handset subsidies, existing operators are very profitable, as evidenced by Telecom Italia Mobile's EBITDA margin of 49.4%.
In Spain, where mobile penetration reached 104% at end-2006, the level of competition has escalated since the end of 2006 with the launch of the first MVNOs and the fourth network operator, Xfera (owned by TeliaSonera), which holds a UMTS licence. Last year, Telefonica Moviles Espana, which controlled more than 45% of the market by subscribers, generated an EBITDA margin of 44.9%, a level above European average for a market leader.
Therefore, KPN's MVNO strategy could exploit the potential to lower the price of mobile telecom services by launching low-cost brands and using internet as a distribution channel.
Royal KPN is the Dutch telecom incumbent operator. In FY06, it generated EUR11.9bn of revenue almost evenly split between its domestic fixed-line telecom services and its mobile businesses in the Netherlands, Germany and Belgium. KPN continued to record strong profitability and a sound capital structure as evidenced by its EBITDA margin of 40.5% and its net debt to EBITDA ratio of 1.9x at end-2006."
Posted to the site on 23rd March 2007
