KPN is likely to pay less to shareholders and invest more in its telecoms networks after Mexican billionaire Carlos Slim took effective control, analysts said, in a strategy reversal intended to revive the Dutch company. America Movil, owned by Slim, acquired a 27.7% stake in KPN last week, becoming its biggest shareholder with effective control due to the low attendance rate at shareholders meetings.
KPN (The Hague, Netherlands), the largest telecommunications provider in the Netherlands and former state monopoly, is fighting eroding profits in its Dutch home market, where mobile customers increasingly use internet applications instead of traditional text messages.
After first-quarter core profit fell 13%, KPN said new tariff plans and a cost-cutting program would bear fruit later this year. Now analysts expect America Movil (Mexico City, Mexico) to spur more radical action - cutting the dividend to invest in fixed and mobile networks.
Bernstein (New York City) analyst Robin Bienenstock on Wednesday said KPN could announce a 50% dividend cut to help fund an upcoming spectrum auction in the Netherlands. America Movil would be unlikely to agree to a sale of the group's Belgian unit BASE, which KPN had planned to divest before it came on board, she said.
"To sell one of your fastest-growing businesses in order to give cash to investors, doesn't make good financial sense," Bienenstock said, adding that America Movil Chief Financial Officer Carlos Garcia-Moreno had said that KPN's Belgium business was an attractive asset.
The dividend cut could come as soon as July 24, when KPN reports second-quarter results, Bienenstock said. A KPN spokesman declined to comment on Wednesday.
KPN said in April it remained committed to its dividend of $1.1 per share proposed for 2012. The dividend has increased steadily from $0.42 per share in 2004 to $1.04 in 2011.
If KPN cuts its dividend, it would join European peers including Telecom Italia, Telefonica and even America Movil's other European holding, Telekom Austria, which have already lowered payouts to shareholders. Dutch shareholders organization VEB, which represents individual investors, accepted the need for a cut.
"What has happened in the past is that the dividend has worn on KPN and that was not sustainable. You can only conclude that there has to be a dividend cut to guarantee future profits," said VEB's Jasper Jansen.
Analysts also see the need for KPN to invest in its broadband services, where there is tough competition with cable operators that can often offer higher download speeds.
"Under the previous CEO the focus was on buy-backs, shareholder remuneration and cost cutting and less on investments so they probably have some catching up to do," said Petercam analyst Stefaan Genoe, referring to Ad Scheepbouwer, who chief executive Eelco Blok replaced in April 2011.
KPN currently forecasts capital expenditure of between $2.4 and $2.7 billion in 2012, slightly up from $2.51 billion in 2011.
Theodoor Gilissen (Amsterdam, Netherlands) analyst Jos Versteeg pointed to America Movil's track record on investment, citing Embratel in Brazil. "It invested heavily in satellite TV and had 3 million subscribers while the competition was still only talking about TV," said Versteeg. He added that America Movil had also lowered prices in the markets it entered, which also required investments in the fixed and mobile infrastructure.
Analyst Jeffrey Vonk at ING (Amsterdam, Netherlands) said that cutting the dividend and stepping up investments would be a viable strategy even without America Movil's intervention.
"If you want to compete with cable, you have to work on your product offering. That costs money and given their high pay-out ratios that's where the money has to come from," he said.
America Movil has said it supported KPN's current strategy and would mainly focus on finding synergies, for example through joint procurement of technology.
On Tuesday KPN announced it has joined forces with six other companies to form a global M2M partnership. Under the partnership, KPN, NTT DoCoMo, Rogers, SingTel, Telefonica, Tesltra and VimpelCom will partner of roaming and development of M2M services.
(Editing by Erica Billingham)