Game theory 1

KPN has this morning announced the acquisition of Telfort, the former O2 wireless business in the Dutch market, for EUR980m in cash and assumed debt, plus an earnout of up to EUR140m, subject to undisclosed performance criteria.

Since being taken private, Telfort has targeted the more cost-conscious segment of the market and has been particularly aggressive in the prepaid segment (the last published data shows ARPU at EUR26, versus EUR33 for KPN in the most recent fiscal year, and EUR28 in Q1). This move appears to echo TDC's acquisition of MVNO Telmore (and E-Plus' creation of the Simyo brand in Germany), as an attempt to partially stabilize a tough domestic market and gain some exposure to growth in more marginal market segments. The press release alludes to operational (and presumably) network synergies, though these are not quantified presently.

Telmore has 2.4m subscribers, which will take KPN to a market share of subscribers above 50% in the market, and apparently drive it toward its 40% revenue share target. In its most recent financial year (the company still reports on a March year-end as a legacy of the BT/O2 days) Telfort generated EBITDA of EUR97m on sales of EUR509m (margin 19.1%, vs. 38% for KPN in Q1). So here we have ARPU and margin dilution in the name of reaching a capital markets-facing target, with the additional benefits of taking out an irritating competitor and generating a tax shield. Financial ratios look to be safe for now, based on the little information we have, and the market has initially interpreted this transaction positively. Not bad, but will it ultimately be viewed as the right deployment of EUR1bn, and is it enough to fundamentally change KPN's long term prospects?