Deutsche Telekom looked at bidding for KPN in 2014

By Reuters

Jan 17, 2015 04:10 AM EST

Deutsche Telekom considered making a takeover bid for Dutch rival KPN in 2014, with a view to expanding in neighboring countries, sources familiar with the matter said.

With opinion split on whether the German telecoms group might revive its interest, three sources said it actively explored an offer in the autumn.

It then put the project on hold to concentrate on the sale of the UK's biggest mobile network operator EE, jointly owned with Orange, to BT Group.

"Once the EE deal is closed Deutsche Telekom may revive the project," one of the sources said, adding that it was unclear if or when that might be. The EE deal is expected to close by the end of the year.

"They didn't go ahead with a formal bid," another person close to the matter said. The sources also said it was unclear whether the two companies held discussions on the subject.

KPN's shares were up 5.4 percent by 1515 GMT at the top of a 1 percent stronger STOXX Europe 600 Telecommunications index, while Deutsche Telekom was up 0.1 percent. Both companies declined to comment.

An analyst who declined to be identified said KPN caught the attention of Deutsche Telekom last year as it eyed a possible multi-billion dollar windfall from a potential sale of its T-Mobile US unit

"Now that it looks like they will be around in the U.S. for a while and an expensive frequency auctions are looming in the U.S. and in Germany, I think the KPN deal is no longer an option," he said. "It will be complicated to justify any premium on KPN at the moment."

Deutsche Telekom is not likely to make an offer for KPN, a person close Deutsche Telekom's management added. "Deutsche Telekom will not take any action which potentially will impact its credit ratings."

Deutsche Telekom has been cutting its overseas exposure and reducing its debt which piled up in an acquisition spree in the early 2000s. It is currently focusing on providing telecoms services in mainland Europe and has already completed several smaller deals in countries adjacent to its home market.

An acquisition of KPN would fit in with this strategy as operators seek to offer converged "quad-play" packages of television, broadband, mobile and fixed-line telephony services.

KPN's network is almost completely convergent and already has technology in place using the internet communications protocol that could be used as a model for other European telecoms markets where Deutsche Telekom is active.

KPN is also regarded as being relatively cheap, having lost more than half of its value in the last three years, while in the same period Deutsche Telekom's share price has risen over 50 percent.

KPN currently has a market capitalization of 10.8 billion euros and net debt of 6.1 billion as of September 2014, while Deutsche Telekom has a market value of 74 billion euros and net debt of 41.8 billion euros.

To get any deal done Deutsche Telekom would first have to win over KPN's 24.8 percent shareholder America Movil, controlled by Mexican billionaire Carlos Slim.

"That should be easy. Slim is regarded as a seller," one of the sources said, adding that Slim pushed through the sale of KPN's German mobile unit E-Plus to Telefonica Deutschland last year.

EU competition regulators conditionally approved that deal in July, clearing the way for Deutsche Telekom to consider making a move on KPN.

To acquire KPN, Deutsche Telekom might also be prepared to sell its existing Dutch mobile business under the T-Mobile brand. But overcoming Dutch nationalism would be another challenge, the sources said.

"KPN is an incumbent (former monopoly national network operator) and there is some politics around it," one of the sources said.

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