KPNQwest: We’re not for sale

After a sharp decline in its share price, KPNQwest is trying to hush talk that Dutch operator KPN Telecom is trying to sell its stake in the pan-European joint venture as part of debt reduction efforts.

According to statement released by KPNQwest today, KPN cannot sell its 44% share of KPNQwest without the consent of its U.S. partner, Qwest Communications. That’s an unlikely scenario, because KPNQwest’s stock is at historic lows, according to statements by KPNQwest executives.

A Qwest spokesman declined to say whether the company would give its consent to the sale of KPN’s stake. In previous public statements, Qwest has said it is committed to the joint venture and would be willing to buy out KPN if the Dutch operator were in dire financial straits.

Under the joint venture’s agreement, until April 1, 2004, neither KPN nor Qwest can transfer KPNQwest shares to any party without the other’s consent. After April 1, 2004, KPN can sell its share but must give Qwest the right of first refusal. Qwest is subject to the same restrictions.

However, besides Qwest, there are few other buyers positioned to buy a pan-European network. Deutsche Telekom--one potential candidate--is struggling with its own mountain of debt. And it is unlikely that Qwest would want a U.S. incumbent such as Verizon or SBC Communications to have full knowledge of its network operation and back-office systems.

KPNQwest shares lost more than third of their value this week after KPN chief executive Paul Smits hinted that KPN’s stake in KPNQwest could be on the block. KPN is trying to reduce its $20.7 billion debt load and has said that it will look all options except the sale of its fixed-line network.

At a quarterly revenue run rate of $207 million and a current market capitalization of only $1.9 billion, KPNQwest could be a bargain for an acquirer. In its latest quarterly results, the company pushed its gross margins above 40% and reached EBITDA positive. It reiterated today that it expects to record a net profit in the fourth quarter of 2002.

But the perceived lack of support from its corporate shareholders is damaging KPNQwest’s credit rating. Moody’s put KPNQwest’s rating of “Ba1” under review for a possible downgrade, citing unfavorable market conditions and the “implicit support” factored into the rating from KPN, which was downgraded last week.

Meanwhile, KPN is trying to dispose of non-core businesses. KPN is in talks with Dutch construction company Koninklijke Volker Wessels Stevin to sell its $542 million network building unit, KPN Network Bouw. And it has registered for sale its 18% stake in U.S. operator Infonet Services.

KPN’s merger talks with Belgian operator Belgacom collapsed last week, and Moody’s subsequently lowered KPN’s “Baa2” senior unsecured debt rating to “Baa3”--one grade above “junk” status--and its subordinated long-term debt rating to “Ba1” from “Baa3.”

Further downgrades hinge on KPN’s ability to significantly reduce its debt load this year from a combination of asset disposals and equity raising, Moody’s said in a statement.