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By RENÉE SCHULTES
Just when many companies are raising cheap debt to buy back shares and pay dividends, Royal KPN KPN.AE +0.63%is doing the opposite.
Not surprisingly, the Dutch telecom operator's decision to launch a €4 billion ($5.36 billion) rights issue, equivalent to two-thirds of its preannouncement market value, this week has gone down badly with shareholders. The stock has lost 22% of its value. But investors shouldn't count on imminent salvation from 28% shareholder America Movil, AMX.MX +1.07%controlled by Mexican tycoon Carlos Slim.
KPN has been in trouble for some time. Its shares have dropped by more than 70% since Chief Executive Eelco Blok took the helm in April 2011. Blame that on his predecessor, who handed cash back to shareholders but skimped on necessary investments. KPN says it needs to spend €7 billion over the next three years at a time when operating cash flow is falling.
Without new equity, credit-rating firms would have downgraded its debt to "junk" status, pushing up borrowing costs. The rights issue will reduce net debt to below 2.5 times earnings before interest, taxes, depreciation and amortization, or Ebitda, at the end of next year from four times when soon-to-be-consolidated commitments and spectrum costs are included.
Mr. Slim has yet to say whether he would take up his rights. Even if he does, it would cost him €1.1 billion. But if he doesn't, he could face more than 50% dilution, assuming the new shares are issued at a 40% discount to the preannouncement price. Some shareholders may hope Mr. Slim takes advantage of the share-price weakness to mount a full bid. Although a mandatory offer triggered by any increase in his stake above 30% would need to be pitched at €8 a share, there is nothing to stop him from making a voluntary offer. KPN's shares were up 0.9%, to €3.18, on Friday in Amsterdam.
But that may depend on whether he believes KPN can halt the slide in its cash flow. Its strategy is to sacrifice margins in an attempt to expand market share in the Netherlands, Germany and Belgium. But the market seems unconvinced given increasing competition, particularly in Germany and Belgium. Ebitda fell 12% last year to €4.5 billion and could fall at least another 15% this year, estimates Bernstein Research. Even if Mr. Slim does want to take full control of KPN, he may prefer to bide his time.