America Movil's target KPN ends lavish payouts, invests to catch up
* KPN previously paid out high dividends, invested little
* Dutch telecoms group has now cut payouts
* Company will invest 20 pct of revenues in networks in 2013
BRUSSELS, Sept 18 (Reuters) - Dutch telecoms group KPN has acted to catch up with European rivals after years of underperformance and may be nearing a turning point as it faces a takeover offer by Mexico's America Movil.
For years, the largest Dutch telecoms provider paid huge dividends and bought back shares rather than invest. It lagged behind peers in jumping on new trends in television and bundled services to limit the damage from free services such as Skype.
Now that KPN has cut dividends and piled billions into innovation such as pioneering Dutch 4G high-speed mobile networks, the Mexican group stands to pick up a company that needs very little work to be fit for the next strategic push.
Before America Movil announced it would bid for a minority stake in the Dutch company in May 2012, KPN's shares had fallen 50 percent from a October 2009 high, underperforming the STOXX 600 Telecoms Index which was down about 5 percent.
Telecoms revenues and profits in Europe were hurting from tough competition, regulatory price caps on mobile calls and users abandoning texts and calls for free internet applications.
But in 2009, KPN spent almost 90 percent of its net profit on dividends and share buybacks, in 2010 and 2011 this was 120 percent and in 2012 more than 140 percent.
"KPN took on incremental debt to pay out cash to its shareholders it couldn't afford. Nobody else did that," said analyst Robin Bienenstock at Bernstein.
While rewarding shareholders, the group neglected to invest enough in its network, analysts say.
KPN spent 13.3 percent of revenues on capital spending in 2009 - below Deutsche Telekom, which spent 14.2 percent and Swisscom's 16.8 percent.
"They focused too much on costs and share buyback programmes when they should have used those funds to invest in a higher quality network," said analyst Stefaan Genoe at Petercam.
KPN said it does not comment on analyses or opinions.
NO LOW-HANGING FRUIT
America Movil cannot count on finding easy changes to make to boost profits, as KPN has done much of the work already.
It increased capital spending to 17.3 percent of revenues in 2012 and will spend up to 20 percent of those expected by analysts this year, targeting investment of up to 7 billion euros ($9.4 billion) until 2015.
That is much more than Deutsche Telekom, which plans investments of 16.9 percent of expected revenues in 2013 and even Swisscom, known for spending on its networks, which will devote 18.7 percent of revenues this year.
KPN is the first operator in the Netherlands to offer high-speed mobile broadband services, known as 4G, in the country and has said it will speed up the network's roll-out.
It has launched a string of new offers, combining all its services, and revamped tariffs to meet growth in mobile data.
Its dividend, which analysts say has been too high for too long, has been reduced since 2012. KPN announced in April that it would scrap a payout completely for this year and next.
"At the moment they are doing the best that they can. I don't see how America Movil could do any different," said analyst Will Draper at Espirito Santo.
The 7.2 billion euro offer for the part of KPN that America Movil does not already own aims to give billionaire Carlos Slim an entry to Europe for his flagship company.
But, despite all its changes, KPN still has a way to go to catch up with the continent's sharper players.
Analysts say it has been slow to launch new voice and data packages.
"Some have been more proactive, like Swisscom or even Belgacom, which has been more advanced in growing its conversion products," said Macquarie analyst Guy Peddy.
For the whole of 2012 Belgium's Belgacom was one of few telecoms operators in Europe to report an increase in revenues, with its consumer business growing by 1.4 percent.
In the same year, KPN's revenues fell 3.5 percent.
Belgacom introduced "quadruple play" offers four years ago, combining fixed and mobile telephones, digital TV and broadband Internet, to counter falling revenues.
KPN began selling quadruple play offers only this year.
Belgacom moved sooner into areas such as digital television while KPN's TV service initially focused on a product based on a digital antenna, which has fewer on-demand features.
When Belgacom exceeded 1 million TV customers in the first quarter of 2011, in a market with a population about a third smaller than the Netherlands, KPN's IPTV (digital TV via broadband internet) product only had 360,000 customers.
"At one stage Belgacom even owned the soccer rights in Belgium to show on its TV product. KPN didn't have anything like this. I'd say that until a year ago if you wanted TV in the Netherlands you went to the cable competition," Petercam's Genoe said.