Fitch Affirms KPN at 'BBB-'; Outlook Stable
Published on: 16th Apr 2014
By: Ian Mansfield
Fitch Ratings has affirmed KPN's Long term debt rating at 'BBB '. The Outlook is Stable.
Fitch says that KPN continued to take steps to strengthen its domestic competitive position in 2013. However, the domestic market remains challenging, and KPN is yet to demonstrate a sustained and improved financial performance. The sale of E-plus to Telefonica Deutschland, subject to regulatory clearance, will be credit positive as the EUR5bn of cash proceeds will strengthen KPN's balance sheet. The 20.5% stake in the combined entity will give KPN exposure to an operator with a stronger competitive position in the German market.
Fixed Line Improvements
KPN continued to increase its broadband subscriber base in 2013 and gained substantial TV market share. KPN has responded to the competitive threat posed by cable by investing heavily in fibre and IPTV and seeking to grow its multi-play customer base, with quad-play launched in 2013. However, if the likely merger of Ziggo and UPC goes ahead, fixed line competition may intensify as the combined entity gains greater scale. While KPN's operating developments are positive, converting these trends into improved and sustained profitability will be a key driver of any positive rating action.
Intensifying Mobile Competition
KPN's domestic mobile business was adversely impacted in 2013 by growing competition, with new 'no frills' players and an increase in the share of SIM-only subscriptions. KPN has now achieved LTE nationwide coverage and the risk profile is improving as the share of committed revenues from bundles grows. However, Tele2 intends to launch a fourth mobile network and is likely to attempt to gain market share by employing a price challenger strategy. Fitch would consider a positive rating action if KPN can demonstrate that it can effectively manage any challenges posed by Tele2's entry into the market.
E-plus Disposal Positive
The expected EUR5bn cash consideration from the sale of E-plus to Telefonica Deutschland reduces KPN's leverage and exposure to a market that could have proved challenging over the next few years. E-plus is the number 4 operator in Germany and a mobile-only player in a market that is increasingly moving towards integrated fixed-mobile offerings. In Fitch's view, the disposal of the asset makes strategic sense for both parties as the combined entity of E-Plus and Telefonica Deutschland will generate synergies and create a stronger player in the market. The regulatory conditions for the agreed merger are at present unclear and the merger is subject to approval from the antitrust authorities.
Balance Sheet Strengthening
KPN's EUR3bn rights issue and EUR2bn hybrid bonds issue in 2013 strengthened the company's balance sheet and demonstrate the company's commitment to an investment grade profile. However, KPN continues to operate in a challenging environment and operating free cash flow is likely to be put under pressure in 2014.
Simplification Programme to Deliver Efficiencies
In 2013 KPN completed its programme to reduce full-time employees by 4,650, and is now focussed on implementing a Simplification Programme to deliver a more simplified product portfolio and operating model, and reduce employees by a further 1,500-2,000. The company expects this to deliver savings of at least EUR300m per annum by 2016.
Competitive Belgian Market
KPN's Belgian subsidiary, BASE Company, has been impacted by aggressive price competition in the Belgian mobile market, most notably from Telenet, and following new legislation passed in 2012 allowing customers to switch operators free of charge after six months. In Fitch's view, future growth is likely to be derived from the fixed line business subsequent to the launch of a new triple-play package, "Snow", in February 2013, providing fixed telephony, broadband, and TV to the market.