Several telecom related deals have been brokered in Europe over the last couple of months. Vodafone Group Plc (NASDAQ:VOD) (LON:VOD) bought Kabel Deutschland Holding AG (OTCMKTS:KBDHF) (FRA:KD8) (ETR:KD8), Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) announced that it will be selling its handset business to Microsoft Corporation (NASDAQ:MSFT) and Vodafone sold its position in Verizon Wireless back to the company. Each transaction affected hedge funds who were positioned on the long and short side of the companies.
KPN Foundation feeds poison pill to América Móvil
Another M&A event which has controlled hedge fund returns in the past months is the possible sale of Netherlands-based Koninklijke KPN N.V. (OTCMKTS:KKPNY) (AMS:KPN), a telecom and IT company with business in Germany and Belgium as well. Several hedge fund have invested in KPN and have made sizable returns.
KPN is a hot and heavy takeover target as the European telecom industry undergoes a consolidation wave. The company has recieved offers from Mexican telecom major, América Móvil SAB de CV (NYSE:AMX) (NASDAQ:AMOV) and Telefónica S.A. (NYSE:TEF), a Spanish telecommunications provider. The Dutch company has been struggling in the last couple of years as the European economy remained weak. However, shares of KPN have gained over 55% from July to date, after losing nearly the same in the first two quarters. Not surprisingly KPN was a target of shortsellers in 2012 and in the earlier part of this year.
América Móvil, Latin America’s largest telecom company controlled by Carlos Slim, was the largest shareholder in Koninklijke KPN N.V. (OTCMKTS:KKPNY) (AMS:KPN) with a 30% stake. América Móvil SAB de CV (NYSE:AMX) (NASDAQ:AMOV) was caught off-guard as the foundation of KPN shareholders used its power to issue preferred shares, thus raising its control to 50% of KPN’s stock and essentially diluting the voting power of AMX to half.
The poison pill defense came in response to the unsolicited and informal offer from AMX to buy a larger stake in KPN at 2.4 euros/share. AMX already holds 30% of KPN and wanted to buy the entire company, however subsequent negotiations with the KPN’s management were unsuccessful. América Móvil’s bid to buy Koninklijke KPN N.V. (OTCMKTS:KKPNY) (AMS:KPN) was the first time the Mexican company sought to expand outside North America. Analysts think that it is unlikely that this will be the last offer AMX will make, however for now things are not moving forward. América Móvil had bought the initial position in KPN at 3.24 euros/share and has refused to sweeten its current bid for a larger stake.
Redemption of preferred shares
Just today the foundation of KPN decided to unwind the 50% voting stake in KPN, saying that it saw no reason to further delay the redemption of the preferred shares. This opens the opportunity for AMX to boost its stake in Koninklijke KPN N.V. (OTCMKTS:KKPNY) (AMS:KPN) and perhaps rethink its offer. In a report today, UBS noted, “We believe this removes a major barrier to an AMX take-over and this news is likely to re-ignite hopes of AMX returning with an offer in six months,…, We see AMX returning for KPN as an option on the upside and do not believe it would sell its stake, given it is nursing notable losses.”
Bernstein Research also raised their price target to 3.15 euros at end of October, citing stabilizing core business, an undervalued 20% position in O2D and its significant place in the European telecom market as it consolidates.
Telefonica buys KPN’s German unit
Separately, KPN is close to finalizing the sale of its German unit, E-Plus, to Telefonica Deutschland Holding AG (ETR:O2D) (FRA:O2D) for 8.1 billion euros or $11.07 billion. Telefonica will be submitting antitrust documents to seek approval for the purchase of E-Plus from European regulatory authority in the mid of this month. The combined company will be valued at nearly $17 billion, and the transaction has the approval of Carlos Slim.
KPN drives hedge fund returns
Polygon Global Investors’s European Equity Opportunity Fund, managed by Reade Griffith and Nicholas Dautigny, applies an event-driven strategy. Polygon is closely watching the developments around Koninklijke KPN N.V. (OTCMKTS:KKPNY) (AMS:KPN), as it maintains a long position in the stock. Griffith and Dautigny believe that despite some recent volatility, KPN is a position to hold on to, as sooner or later it will get a lucrative offer.
Polygon’s European Equity Opportunity Fund gained a handsome 3.01% in October, pushing the year to date gain to +16.2%. Meanwhile HFRX Equity Hedge Index is up 8.5% and HFRX Event Driven Index has returned 12.3% over the same period.
Another fund, Allen Global Partners took up a position in KPN in July, just as talks with Telefonica were taking a decisive course. KPN was among Allen Global’s top performers of Q3, adding 0.2% in gross return individually. Allen Global Partners gained 1.65% in Q3 and is up 4.77% for the year.
Odey, Discovery gain from KPN
Odey Asset Management also has a long position in the Dutch company; the holding contributed +0.29% to the return of its Odey Absolute Return Fund, according to the September investor letter. The fund was up 35.8% in the three quarters of this year. Odey Asset Management owned 10.8 million shares of KPN as of July 31.
AQR Capital’s AQR Diversified Fund holds 2.22 million shares of the company. Tiger Cub Rob Citrone’s Discovery Capital holds a 1.9% position in the company.
Orange could buy KPN
While no deal has been inked yet, it is certain that there are many buyers available for this company. Reports from a French newspaper suggest that the leading French telecommunications services provider, Orange SA (NYSE:ORAN) (EPA:ORA), formerly France Telecom, is also mulling over the possibility of buying KPN. Orange CEO Stephane Richard is reportedly looking at the matter closely. Orange wants to expand its business in Europe, and is also thinking over increasing its position in Deutsche Telekom AG (OTCMKTS:DTEGY), the reports suggest.