KPN and mmO2 have been having talks about having talks about merging, the Observer reports.
Exciting, yes? Er, no: takeover discussions have not yet reached the starting stalls. Says the Observer: "Informed sources stressed that the talks, held within the last two months, were informal and nothing was currently being discussed."
As the Observer notes, a helluva lot of financial engineering would be needed to make such a deal work. KPN, the parent of KPN Mobile, has £10 billion of debt, while mmO2 is relatively debt-free. So why bother? Well, mmO2 is the most obvious candidate for prey in the next round of European network operator consolidation. Backbreaking costs for the 3G network licences and build-out will force this consolidation, pundits say. But where is the money to make it happen?
Vodafone, Deutsche Telekom-owned T-Mobile, and France Telecom-owned Orange, are the most obvious European consolidators. But Vodafone, realistically, can buy only in France, where neither KPN or mmO2 operate. Orange and T-Mobile, are, courtesy of their debt-ridden parent companies, in no position to buy.
So what about a consolidating outsider, say NTT DoCoMo, or its affiliate Hutchison Whampoa? Indications here too are unpromising. DoCoMo is already a minor shareholder, a very minor shareholder, in KPN Mobile.
In December 2002, the Japanese firm spurned a request to participate in a capital increase in KPN Mobile, reducing its stake in the firm from 15 per cent to 2.2 per cent. KPN Mobile and NTT DoCoMo are both minority shareholders in Hutchison 3G, which also has its begging bowl out. Hutchison Whampoa, the majority owner of H3G, meanwhile, has its hands full with funding its greenfield 3G network.
For the likes of KPN Mobile and mmO2 that leaves either a private equity-funded buyout, or the investment banking community's brightest, but exceedingly under-employed minds, to work out the companies can consolidate themselves, in the absence of a credible market for public share offerings.
KPN Mobile is also the smaller of the two with 13.7 million subscribers, against 18.5 million for mmO2. And KPN needs a deal more than mmO2, according to a source, cited by the Observer. But, as it is 85 per cent owned by KPN, it should have access to help in any capital re-organisation.
The mobile network operators overlap in The Netherlands and Germany, while KPN also hangs out in Belgium and Luxembourg, and mmO2 goes to battle for subscribers in the UK and Ireland. A KPN E-Plus/mmO2 combo would, however, deliver a more credible competitor in Germany, where KPN is said (by the Observer) to be struggling.
Any merger would surely see mmO2 flogging off its loss-making ops in the Netherlands, where KPN is the dominant player. But that's no problem - as the business is already up for sale. Trouble is, no one seems very keen to buy it, right now. ®