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Carlos Slim’s $9.6 Billion Bid

Monday - 8/12/2013, 4:22am  ET

Carlos Slim, the Mexican billionaire mogul who is the world’s second richest man, plans to buy out the Dutch telecommunications company Royal KPN (NASDAQOTH: KKPNY) for 7.2 billion euros ($9.6 billion). Slim is ratcheting up the battle between his own telecommunications company America Movil and Telefonica in the European stage. Will Slim’s $9.6 billion wager come to fruition for shareholders of America Movil and Royal KPN, or is this development only to be fraught with regulatory hurdles and costly trouble? So far, Slim’s forays into Europe have only lost money on paper, but if he can successfully pull off this buyout then chances are the proposal might produce positive results.

Events Leading up to Slim’s Buyout Offer

America Movil currently provides telecommunications services to the United States, Latin America, and the Caribbean. America Movil and arch-rival Telefonica currently control about 60% of the mobile phone market in Latin America. Carlos Slim has been seeking to expand America Movil’s reach in Europe, as shown by large stakes Slim bought in both Royal KPN and Telekom Austria in 2012.

Slim’s current endeavor to buy out Royal KPN is complicated by the stagnant state of the European economy and an agreement Royal KPN signed with Telefonica. Royal KPN has agreed to sell both KPN’s 17.6% stake in Telefonica Deutschland as well as 100% of the company’s interest in German mobile operator E-Plus to Telefonica’s German operations for approximately $6.7 billion.

Why Slim Would Gain from Acquiring Royal KPN

Slim would like to obtain the rest of Royal KPN in order to better compete in the European market. The $9.6 billion deal most likely is partially hinged on the assumption that Europe’s economy is going to rebound soon or that the telecommunications industry in Europe will improve.

Should America Movil acquire KPN, they would be in a position to also gain E-Plus from Telefonica. E-Plus has a 15% stake in the German market, and acquiring E-Plus would be a damper on Telefonica and significantly boost America Movil’s presence in Europe.

However, America Movil might seek to sell E-Plus at a higher price to Telefonica. Andres Bolumburu, an analyst at Banco de Sabadell, explains: "...the fact that Slim hasn’t made a decision over Telefonica’s bid for E-Plus suggests that the billionaire will seek a sweetened offer from [Telefonica]."

Telefonica desires E-Plus in order to compete with Vodafone and Deutsche Telekom in Germany. If Slim buys KPN, then he could ironically use KPN as leverage to obtain more euros out of Telefonica.

Regardless of what Slim or KPN does with E-Plus, it seems that the Mexican tycoon wants to expand America Movil’s reach and ratchet up competition with Telefonica.

Hurdles the Deal Might Face

The proposed offer needs to be approved by anti-trust lawmakers. Also, KPN has stated that all possible options are being taken under consideration, and the deal would obviously need to be approved by KPN itself. Whatever that means for America Movil is not certain at this time, but KPN isn’t jumping to sell itself to America Movil.

A larger issue that Slim could face is that an independent foundation has the responsibility for defending KPN “from influences that may threaten the continuity, independence and identity” of the company, according to KPN’s filings. If that independent advisor group’s board sees this buyout as a threat, Slim’s ambitions could come to a halt.

Who Will Benefit if the Deal Goes Through

Investors in America Movil, KPN, or Telefonica should track the details of Slim’s $9.6 billion offer closely to see if the deal will go through or not. The more important question, though, is what are the implications if the proposed deal does get approved?

The primary beneficiary of an America Movil buyout would be KPN. Slim’s offer is a 35.4% premium over the average closing price of KPN's ordinary shares. Investors in KPN would therefore be handsomely rewarded from the gains.

America Movil would most likely be benefited as well, although in a less tangible way. According to Sanford C. Bernstein & Company analysts, America Movil would need to cancel a share buyback program and obtain $4 billion of debt financing in order to buy out KPN. This purchase is certainly not guaranteed to succeed, but as previously mentioned Slim could use this buyout to gain more market share in Europe and obtain money from Telefonica.

Telefonica would most likely be the biggest loser if the KPN deal did go through. However, as previously discussed, Telefonica might still obtain E-Plus – but, at a higher price.

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