The debt ratings agency, Moody's has today KPN's senior unsecured long-term debt rating to Baa1 from Baa2 and the subordinated long-term debt rating to Baa2 from Baa3. Moody's says that the upgrade factors KPN's managements continuing efforts to reduce financial risk, as well as the assumption that KPN will, for the foreseeable future, operate with a relatively conservative balance sheet and continue to generate improved levels of free cash flow. Moody's has also assigned a short term issuer rating of Prime-2. This rating action concludes the review launched on 10 April 2003. The outlook is stable.
Moody's has assessed KPN's continuing operations in the light of the significant reduction in debt during 2002, as well as a significant improvement in operational cash flow through 2003 into 2004 and beyond. Whilst Moody's notes that US$1.3 billion of US$4.5 billion of operating cash flow in 2002 came from working capital initiatives, the impact of which is not expected to be repeated, Moody's believes that KPN will continue to benefit from having created an operationally more efficient structure than was previously the case. Furthermore, Moody's expects that KPN will continue to reduce headcount via the "Social Plan" as well as from natural attrition.
KPN's current expectations are for capex of circa US$ 1.7 billion in 2003, but Moody's considers that KPN's future capex requirements will rise by at least several hundred million euros. However, Moody's considers KPN's management will continue to focus on KPN's core businesses, and cost initaitives within them, allowing for sustainable free cash flow generation which Moody's expects to be between US$1.74 billion to US$1.86 billion per annum. In the immediate term, Moody's expects that this free cash flow will be mostly used to continue to reduce debt below the company's US$11.6 billion net debt target, although the Agency does expect that modest dividend payments are likely to recommence from mid 2004.
Moody's has factored the expectation that KPN will experience a benign tax environment, assuming that KPN has an effective tax shelter during 2003 and 2004, possibly receiving a cash inflow from tax rebates. Moody's has also factored the expected receipt of US$93 million from a special dividend from Cesky Telecom as well as some US$255 million from the sale of its 6.48% direct equity holding in Cesky. KPN's remaining 13.8% equity stake in Cesky is held indirectly through its 51% participation in Telsource, and is not expected to be disposed of until 2005. Additionally, KPN has other non core investments which could be worth up to several hundred million Euros, which the rating agency expects KPN will dispose of over the next two years.
Despite having five mobile operators in the Dutch market, KPN has managed to broadly maintain its market share above 40%, whilst benefiting from improving APRU, in part due to a decrease in inactive customers as well as from a proportionate increase in contract customers, which generate higher revenue than pre-paid. There has been a very significant increase in EBITDA margin at E-Plus between 2001 and 2002, up from 19% to 27%, but in line with their stated strategy of increasing market share, Moody's has assumed that EBITDA margin will fall closer to 20% during 2003 and 2004. Ultimately, Moody's considers that in the absence of any merger, E-Plus needs to create organic growth, but considers that KPN will not risk E-Plus' cash flow generation, via an overly aggressive strategy. Furthermore Moody's has factored the potential for consolidation in the German mobile market, negatively impacting (at least initially) upon KPN's financial position. Given the conservative approach of KPN's management team, Moody's have assumed that if KPN is involved in a merger / acquisition in the German market, it will involve relatively little cash.
Operationally, there has been a significant improvement within all three of KPN's mobile businesses. However, Moody's considers BASE (the last of three entrants to the Belgium market) to be currently in a weak position with only some 1.1 million customers at Q1 2003, and questions its ability to create the critical mass required to generate positive free cash flow.
KPN's fixed line operations, including business solutions, have enjoyed EBITDA margin growth during 2002, and despite suffering call pre-selection in the local domestic market in August 2002, only suffered a less than 4% market share loss. KPN also benefited from the removal of the CPI-X price cap in 2002, and is now able to increase its tariffs and access fees in line with inflation. Given the harsh trading environment a number of KPN's competitors face, Moody's do not consider KPN to be under strong tariff pressure, and given management's focus upon the cost base, expect further headcount reduction and greater efficiency to improve the company's ability to generate strong cash flow without suffering notable market share loss.
In terms of potentially negative actions, Moody's has factored the current legal dispute with Hutchison 3G UK Holdings, which is not expected to have any major cash flow impact."
Posted to the site on 24th June 2003
Posted to: www.cellular-news.com/story/9119.php