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July 16, 2006 6:06 pm

Casema deal will add to KPN’s woes

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Life is about to get a whole lot tougher for KPN, the Dutch telecoms company which has resorted to legal action to fight competition at a time of rapidly declining traditional telephony revenues.

Officials were putting the final touches to an expected €2.1bn ($2.7bn) deal at the weekend which will see Casema, the third-largest Dutch cable company, sold to private equity buyers. The move strengthens the hand of KPN’s rivals at a time when the former incumbent argues it is having to defend itself “with one arm behind its back”.

It is likely to prove a prelude to the sale of Kabelcom, owned by Dutch energy utility Essent and the second-largest operator with 1.8m subscribers. That process is drawing to a close and is said to have attracted some of those who chased Casema.

Besides Cinven and Warburg Pincus, the private equity groups that bought Casema, the contest involved BC Partners, Macquarie and Liberty, a person close to the process confirmed.

What will trouble KPN is the fact that Warburg Pincus also owns Multikabel, a cable company with more than 300,000 subscribers in north Holland.

Analysts believe the variety of ways in which Dutch consumers can now receive TV is likely to lessen antitrust concerns. NMA, the Dutch monopolies regulator, would not comment. KPN said it would be watching the situation closely.

The developments come against a background of growing convergence between telephony, TV and internet services – dubbed Triple Play – that have traditionally been delivered to consumers separately and by individual providers.

The cable companies dominate the TV market, with nearly 90 per cent of Dutch homes connected, while KPN has had the lion’s share of telephony.

However, the decline of fixed-line telephony has heightened the urgency of KPN’s efforts to shore up sales with new internet-based offerings.

The Dutch market for internet-based telephony (voice over inter protocol) grew from zero to 362,000 subscribers in 2005.

Ad Scheepbouwer, KPN chief executive, has predicted that by 2010 all telephony will travel by internet. KPN currently has more than 100,000 customers.

Yet it argues that while there is little regulatory control of cable companies offering telephony, it faces a web of regulations restricting its ability to offset that challenge with new services of its own.

With “turnover and profit margins in KPN's fixed networks steadily declining”, it was “losing thousands of traditional phone customers to cable companies every month”, it said.

“The regulator might consider our main competitor to be telephony companies but it is not,” says KPN. “It is cable. Traditional telephony has no future, no one is investing in it.”

Hence the threat to sue the Dutch government for damages if it does not end the “unequal regulation of the cable sector and telecom sector”. Not only was it “seriously constrained from taking full part in the fierce competition between traditional and new providers in telephony market” but its attempts to challenge the cable companies’ monopoly in the television market were “severely hampered by outdated regulation”.

Eric Daalder, a lawyer representing Opta, the Dutch telecoms regulator, says KPN’s problem is that it started its internet-based telephony and digital TV services later than cable rivals. The regulator was correct to distinguish between cable companies and KPN, he said. A ruling is due next week.

Wing-Yen Choi, telecoms analyst at Theodoor Gilissen, says: “I shall be watching with interest to see how revenues develop . . . but in my view if it is to really win customers over, the killer application has to be a totally new technology.”

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