Good day, ladies and gentlemen. Welcome to this KPN Investor Relations conference call. At this time, all participants are in listen only mode. We will be facilitating a short question and answer session towards the end of today's prepared remarks. If you would like to ask a question, you may do so by pressing star one on your telephone. Please note that this event is being recorded. I will now turn the call over to your host for today, Reinout van Ierschot, Head of Investor Relations. You may begin.
Thank you. Good morning, ladies and gentlemen, and thanks for joining us. Welcome to this brief call, covering this morning's announcement that we will form a joint venture with APG to further accelerate the rollout of fiber in the Netherlands. With me on the call today is our CFO, Chris Figee. As usual, I'd like to remind you of the Safe Harbor on page two of the slides, which also applies to any statements made during today's presentation. Let me now hand over to Chris.
Thank you, Reinout. Good morning, everybody. Welcome to our call. I am sure you all looked at the materials that we published this morning, so we will give a quick summary and leave time for questions. This morning, we announced that we are forming a joint venture with giant pension fund APG to further accelerate the rollout of fiber in the Netherlands and enable mostly nationwide coverage of fiber by 2026. This strengthens our strategy as the leading fiber operator in the Netherlands. It accelerates the rollout in the medium dense areas and to businesses as the JV takes up the long tail of our plans, i.e., it delivers additional homes passed on top of the existing plan that KPN has, about half a million homes a year, and has attracted valuation by a strong partner, which clearly underlines the value of our state-of-the-art Fiber to the H ome network.
The four things to remember, we accelerate our fiber rollout. There's going to be no increase in KPN CapEx due to this deal. It demonstrates the value of KPN's fiber optic network, and I would think it's a testimony to our value creation and cash generation mindset in the way we run our business. Let's move to the next slide. JV will be structured as a co-controlled entity with APG and KPN both owning 50% of the shares. The JV will roll out fiber to the home to about 685,000 households in medium dense areas and also connect about 225,000 businesses with fiber in the next five years.
KPN and APG will share the risks and returns in these somewhat underserved areas, while most of the construction capacity in terms of number of homes passed has already been secured with contractors and has a fully underwritten CapEx facility in place as well. Construction capacity and financing has been arranged and is in place. The JV is ready to start with everything in place that we announce today. We partner with APG. APG is one of the largest pension funds, pension investors globally with almost EUR 600 billion in assets under management. APG is an experienced infrastructure investor with strong focus on investing responsibility. APG has commensurate return requirements, providing us access to institutional pension capital from a strong Dutch partner with a long-term investment horizon, a really mutually enforcing partnership. APG helps us to further accelerate the digitization of the Netherlands.
As announced at our Capital Markets Day, we already plan to roll out fiber to 500,000 households annually each and every year until 2025. On top of this, the JV is taking up the long tail of our fiber plans by accelerating the rollout in the medium dense areas and to businesses. Actually, it brings forward the long tail of our plan to the earlier time frame. I think it's interesting to note that with the existing KPN rollout plan and the additional rollout ambitions of joint venture, most of the fiber opportunity, which is about 8 million households in our country, most of the opportunity will be seized by 2026. We see scope to finalize the fiber rollout in the years thereafter, and a small part of the country is simply not economically feasible for fiber rollout.
We think about deploying fixed wireless solutions in those areas, making sure that the entirety of the Netherlands ultimately will be provided with super fast internet. Basically, KPN with the existing plan of 500,000 homes per year, 2.8 million existing portfolio, and its cooperation in this JV with APG should be able to cover about 80% of the Netherlands in 2025. Looking at our longer term plans, this strategic partnership really brings forward the long tail of our plans. Together, KPN and the JV will roll out, as I said, 650,000 lines per year. This is impressive, especially if you realize that the total fiber rollout in the Netherlands across all market participants was just over 500,000 households in 2020. The entire market did 500,000 households last year. KPN on its own with the JV will move to 650,000 households per year in the coming years.
We now expect, as I said, to reach about 80% of household coverage of fiber in 2026, up from 65% by 2025 in our original plans. As these areas were not in scope before 2025, this move will support our commercial performance a few years earlier than initially expected by strengthening our customer footprint in less densely populated areas, by growing service revenues, by limiting the churn on our copper network, and enabling accelerated savings related to phasing out services of our copper network. More footprint, more revenues, less churn, and a faster decommissioning of our copper network. Let me touch on the operational side of the JV. Basically, the JV will build, operate, and maintain a passive infrastructure. KPN will provide the active layer, and KPN provides in-depth expertise when it comes to planning and designing a fiber network.
KPN will act as an anchor tenant on a network providing services to customers. The JV, this is important, will operate through an open access model and will be open for all competitors on comparable commercial terms, further fostering competition innovation in the Netherlands. The JV will operate a passive infrastructure, KPN will drive the active layer, and KPN will become a client of the JV, and the client of the JV will be open to other wholesale parties as well on a fully open access model. The financial terms. APG pays us in total EUR 440 million for a 50% stake in the joint venture. Half of this will be paid upfront, with the remainder to be paid in annual installments as the rollout progresses. Actually, as a function of the number of homes passed that are being delivered.
CapEx for the entity is estimated at EUR 1.2 billion, of which about 70% will be financed by a largely committed CapEx facility. The remainder will be financed with limited equity investments by the shareholders, as well as through the cash flow generated by the JV itself. Important, KPN's equity contribution is more than covered by the initial payment. The initial payment that KPN receives more than covers future equity injections by KPN into the entity. The JV will start distributing dividends to its shareholders when it reaches positive cash flows, currently expected after about five years. The JV will initially be deconsolidated, with KPN having a call option on one share. This enables us to potentially obtain control and potentially reconsolidate in the future. The transaction is subject to regulatory approval and expected to start operations in the mid or the end of the second quarter of this year.
The headline equity valuation of EUR 880 million for this JV, which is 2x the EUR 440 million payment for 50%, translates into an equity value of about EUR 970 per home passed. If you add the debt proportion of the CapEx facility, the enterprise value would be somewhere between EUR 1,800-EUR 2,000 per line. This clearly underscores the value of KPN's state-of-the-art fiber optic network, already growing by 2.8 million homes today, growing by 0.5 million homes per annum in the coming years, and add to that 50% ownership of this entity. It's clear what the value of a fiber network is. To summarize, we are forming a joint venture with APG, a Dutch heritage pension fund, to further accelerate the fiber rollout in the Netherlands. It's an attractive partnership for KPN in a relatively small additional part of our future fiber footprint.
If you think about 2026, this JV constitutes about 12% of the total KPN direct and indirect fiber footprint. A partnership that rolls out fiber in areas that otherwise may have been never addressable for KPN as they were not in existing short-term rollout plans. The JV brings these forward and focuses on the medium-dense areas and business parks. It allows to accelerate and expand the footprint beyond our target footprint faster within the current financial framework. It does not have any impact on our objective or goals of this year. Does not impact our CapEx for this year. It just brings in cash in the year. In fact, it accelerates the rollout to maximum executable speed, pulls forward fiber to the home upgrade benefits, all of this, again, within our current capital allocation and financial framework.
As a result, we believe we reach our long-term sustainable cash conversion levels earlier. There's significant value creation on deal, translating into proceeds upfront and proceeds over time. The upfront payment more than covers our equity injections in the entity, and thereby it demonstrates the significant value of KPN's future and current portfolio in terms of fiber. Strategically, it solidifies KPN's position as the leading fiber to the home infrastructure provider in the country. KPN plus the JV together will cover 80% of the Netherlands with fiber in 2026. That ends my short introduction and comments to the view. Let me open the call for questions. Reinout, can you share the instructions?
Yes. Thank you, Chris. I would like to ask you to limit your questions to one to give everyone an opportunity or as many analysts as possible to ask a question. Operator, you can open the call for questions.
Thank you, sir. Ladies and gentlemen, we will start the question and answer session now. If you would like to ask a question, you may do so by pressing star one on your telephone. The first question is from Mr. Michael Bishop, Goldman Sachs. Go ahead, please.
Thanks very much. Thanks, Chris, for the presentation. I just like to ask a question on valuation and how you came to the various sort of valuation discussions with APG. It's clear from the CapEx numbers that you've given and also the EV value per line you gave in the presentation that this is being valued essentially well above the multiple of book value or CapEx invested. Is there anything else you could give us in terms of how you're thinking about or how you thought about the future valuation, perhaps any sort of run rate, EBITDA metrics? My second question was, you mentioned that KPN would be an anchor tenant, and this is an open access model, but have you actually given any sort of formal underpinning of volume within this agreement? Thanks very much.
Look, Michael, in terms of how this thing is valued, effectively, there's a business plan developed for the joint venture that leads to EBITDA, CapEx, and free cash flows. Then there was a discussion with APG on how to value those cash flows. Effectively, this is a function of the business plan in terms of Fiber to the Home that one rolls out, times penetration and ARPU assumptions, which is valued at an IRR. That drove, actually, the valuation. It's more the function of, I think, the IRR that APG applied to the future cash flows, and that was where the negotiation discussions hinged upon. We felt that the valuation that was given and our estimate of the IRR were very attractive to us, certainly when you compare it to KPN's own cost of capital. That's how we looked at it.
Secondly, when it comes to being an anchor tenant, basically, we developed a business plan together. In the areas in scope, KPN will, of course, migrate its customers to the JV, which is required, because ultimately, it's our desire to decommission the copper network over time. With that, at some point, you have to migrate all your customers out to actually decommission copper. To your answer, the first one is a simple DCF valuation, and then you discuss about the discount rate and see where it sticks. We felt that was an attractive rate compared to the cost at which we could theoretically create equity ourselves. That leads to the value per home passed. Secondly, there are migration agreements embedded in the business plan, and the aim would be to decommission the copper network in these areas at some point in time.
Okay, maybe just to add, please limit your questions to one to give others also opportunity.
Apologies for the two questions. Thanks so much for the answers.
Yeah.
The next question is from Mr. Polo Tang, UBS. Go ahead, please.
Yeah, hi. Thanks for taking the question. I just have one. It's really just about how did the APG joint venture come about? Did you approach them or did they approach you? Could you clarify if you engaged with any other third parties or investors? Thanks.
Mutual discussions. We did not, in all fairness, enter into a broader auction. We felt that APG was a very attractive partner. We engaged in bilateral discussions quickly under the presumption that it would be an attractive transaction. It was not a broader auction because we preferred to have a partner that had a natural Dutch heritage that also strengthens KPN's commitment to the Netherlands. There are all sorts of side benefits to it, qualitative benefits to it. That's it. We considered doing an auction. We did not, because the deal terms that we got, we felt were quite attractive.
Could I clarify, did they approach you?
To be honest, in this situation, we were in contact. We discussed. Honestly, I can't remember who approached who first. I think we discussed things. You meet each other. There were a few other deals that went around, and then it came to table. If I'm completely honest, it's irrelevant. I don't even remember who approached who first. I think it came up in a discussion, like, "Why don't we explore this?
Great. Thanks.
The next question is from Mr. Usman Ghazi, Berenberg. Go ahead, please.
Hi, good. Thank you for taking my question. Just got a question on regulation. I guess we know that the KPN has been deregulated since last year. Obviously, T-Mobile is lobbying aggressively for a change. What happens to this arrangement if the ACM comes in and, I don't know, let's say, deregulates the network? Does this JV still stand, or are there then changes that take place or some compensation paid back to APG, et cetera?
Yeah. Well, first, Usman, I think, to me, it's not a given that ACM will re-regulate the network. If you look at the discussion that KPN is having, or that's ongoing on the regulatory front, we feel confidence that we are fully compliant with the symmetrical access regulation that's out there. First of all, that's not a given. Secondly, the discussions between T-Mobile and KPN really regard T-Mobile and KPN. This entity is a separate entity. It's not sure that if and where there would be an outcome of that discussion, whether immediately would affect the entity. It is really discussions today with regard to KPN network. To the point, if there would be change in regulation, there's always risk to the plan. There will be a risk to the plan, but no immediate repercussions.
Again, I wouldn't be too jumpy on assuming that the current regulation or the current request by T-Mobile would have immediate impact on KPN, because we believe we've got a pretty strong case and already fully compliant with symmetrical access regulation.
Thank you.
The next question is from Mr. David Vagman, ING. Go ahead, please.
Yes. Good morning, everyone. Can you hear me?
Yes.
Okay. Thank you. Just could you disclose or shed some light on the kind of cost of capital assumption that APG has used in its valuation and in your valuation overall?
Well, David, I'm sorry, that you have to ask APG. You have to ask them what cost they used. We've made our estimate. Our estimate is that is in line with a bit cheaper than our cost of equity. It's not for me to disclose. I don't even formally know what cost of capital they used. Our hunch is that it was, for us, a relatively attractive source of capital.
Okay. When you say a bit lower, it's really a bit lower, or it's really very materially lower?
It depends on how you define a bit.
Yeah, exactly.
If my wife offers me a glass of wine, I say, "I want a bit more.
Yeah.
It depends on what a bit is. No, I think it's a bit lower. It's not a huge amount lower.
Okay.
It still feels that we are, as KPN, we're able to raise equity capital a bit cheaper than the equity capital ourselves. Most importantly, it also means that we can accelerate the rollout of fiber, but stay fully within our current financial framework. It does not affect CapEx, not affect free cash flow. It's a way to raise equity capital at a bit cheaper than we would argue ourselves, but most importantly, protect the financial framework, our cash flows, and dividends that we've committed to.
Thank you for all the detail. I'm limiting myself to one question.
Yes.
All right. Thanks.
The next question is from Mr. Steve Malcolm. Redburn. Go ahead, please.
Yeah. Good morning, guys. Thanks for the presentation today. Really interesting. Just quickly, could you clarify, the equity that you are injecting into the JV, is that basically your active layer plus your retail anchor tenancy? Over the six years of the plan, you will effectively have to inject no cash, that all the construction and build-out will be done through debt and the APG equity injection? Thanks.
Well, look, basically, the JV has a business plan that has a plan to fund the rollout of fiber, 700,000 homes passed in retail at about 225 in business parks. Over 900,000 homes passed, around the 900,000 homes passed in terms of total connections. There's a plan. There's about 70% debt financed to a CapEx and the rest is equity. The equity will be injected by APG and KPN. The point, our equity injection is funded by the upfront cash payment. That's actually irrespective of the active layer fees. It is actually funded effectively or over-funded by the equity, the cash compensation we get up front. APG pays us an amount up front, EUR 220 million upfront and EUR 220 million over time. That is widely sufficient to cover the equity injections into the JV to meet the financial structure of the JV. That is completely separate from the active layer income because that's a separate income stream.
Okay. The active layer income is a small number. We shouldn't assume this makes any difference to your current financial guidance, EBITDA of EUR 2.45 in 2023. Does that apply to that number?
It will be a larger number in the long term, but in the coming plan and guidance period, it's not. It will be an additional wholesale income stream. I think you can probably model it out. Think about it, if this JV rolls out 150,000 homes connections per year in the coming years, it takes about five years, six years to get to the 900,000. Before this becomes a meaningful active layer income stream, you're probably 2026 and onwards. It actually could become a meaningful income stream. This thing is actually, as we see it, significantly earnings and cash flow accretive. Again, it takes time for the JV to build up its stock of homes passed and build this material income stream. In the coming years, no massive income, additional contribution. In the latter part of this decade, yes, there is.
Okay. No cash, basically, additional cash needs to be injected by KPN. It all comes from the APG equity injection and the debt funding.
Yes, indeed. Yes.
Okay, great. Thanks a lot.
The next question is from Mr. Simon Coles, Barclays. Go ahead, please.
Morning. Thanks for taking the question. I was just wondering, operationally, I think you're saying this is completely separate entity. They're dealing with all the contractors that will roll out the network, and they will completely run the network itself in the future. Is there no scope that they might, say, contract that out to KPN, given you will have, obviously, a sizable workforce running a fiber network in most of the country? I'm just wondering how that'll work. Thank you.
Look, Simon, the entity is a separate entity that has a self-standing business plan and a management team, and there will be supervisory board steering through KPN and APG. Of course, KPN has existing contracts, the JV can use, step in those contracts. We have spent time working on trying to source capacity on behalf of JV, have the JV use existing contracts of KPN. Theoretically, it's theirs to use it or not. In theory, the JV could say, "Look, we're going to source our own fiber construction capacity and leave KPN's contracts elsewhere," because they are, in that sense, independent. However, of course, we have, as KPN, made sure in our dealings with contractors, we have secured production capacity that the JV can then procure and use under the same terms and conditions. In theory, they could be completely separate.
In practice, they are extremely likely to use the capacity that we've sourced to date. Similarly, we are as KPN, we have done our work to source the CapEx facility, which is then a facility that is on the JV's balance sheet, but in theory, they could ignore it and go out to raise funding themselves. In practice, they would use the construction capacity and the financing capacity that KPN has organized, secured through its own networks.
Thanks. Sorry, just to follow up, are you potentially moving staff into this JV out of KPN? I'm just not clear on that.
Hang on a minute. I think the JV will probably run with, think about 30 people in the end state that will work there, directly. Yes, there will be some KPN managers stepping out, but actually are leaving KPN and becoming employed by this group. Think a more entrepreneurial business role. They may hire some people externally. Think about this JV in the end state employing 30, 35 FTEs, out of which, a part will be former KPN employees that leave the mothership and then be employed by this JV in the future.
Okay, cool. That's very cool. Okay, thanks.
The next question is from Mr. Konrad Zomer, ABN AMRO. Go ahead, please
Hi, good morning. A question on the deconsolidation of this JV. Is it your intention at some point in a few years' time to consolidate this? Is the main reason not to consolidate it as from now the additional debt that it will bring to KPN's balance sheet?
Well, look, Konrad, I need to pick and choose our words very carefully here. The JV will be deconsolidated. That means that the CapEx debt and debt that the JV runs will not be consolidated by KPN. We have the option to consolidate in a few years' time. It's a function of time and a function of number of homes passed. We've got the option to consolidate. Think of that option is only executable when the majority of the CapEx is behind us and the majority of the homes passed have been delivered. Again, I need to pick my words very carefully. We have the option to consolidate.
Okay, I hear you. Thank you.
The next question is from Mr. Joshua Mills, Exane. Go ahead, please.
Hi, guys. I just wanted to understand from an on-the-ground perspective, whether there's any difference between these new areas that you've talked about rolling out to, and then the assumptions which you laid out your Capital Markets Day? Should we assume that things like the take-up rate, the ARPU uplift, and the returns in these areas are similar to those laid out in the Capital Markets Day or different? In particular, does your business plan just require, or the commitments you made just require you to migrate existing KPN customers in the new areas to the JV? In order to hit the requirements of the JV, do you need to actually increase your market share in this 910,000 homes? Thank you.
Yeah. Joshua, look, in the principle, the assumptions are similar, except when you move to semi-dense areas, the cost per home passed tend to be a bit higher, not the mass. Business parks are a different story, but on the retail side, you move to slightly less dense areas, so the cost per home passed is a bit higher than the classical KPN areas, but that's not massive. Business parks, of course, has a slightly different ROI problem. Well, the same IRR profile, but a different CapEx to earnings profile. When it comes to assumptions that are very similar to what KPN has, the JV is not predicated on winning massive market share. It mostly about moving clients from copper to fiber and having a reasonable wholesale access, wholesale penetration similar to KPN.
If we were to gain market share, that would be an add-on in terms of the business plan. Think about predominantly KPN migrations plus a reasonable wholesale business on top of it. There are similar assumptions as our Capital Markets Day with the delta being slightly more expensive lines, cost per homes passed is a bit higher. On business parks, you find when you go to business parks, the cost per homes passed or cost per business connected tends to be a bit higher because you have to dig longer distances. At the same time, businesses are often willing to pay a bit more. Similar ROI, but slightly different CapEx and income streams.
Thanks. Very clear.
The next question is from Mr. Ulrich Rathe, Jefferies. Go ahead, please.
Yeah, thanks. Thank you very much. On a blank sheet of paper, you could do this alone. I think it was actually in your plan in the outer years beyond 2025. You do it faster and without some additional cash outlay, as I understand it. What you give up for that is the share in future returns. The one thing you are saying here is that the upfront payments from APG are covering the cash outlays during the rollout, which suggests that you have left very significant returns in the joint venture. As I understand it, these returns are essentially discretionary, right? Because you set the transfer price into KPN at the wholesale level. I'm just wondering, how do you think about that strategically?
Because at the end of the day, you're not telling us how much returns you are handing over to your partner for the benefit of doing it faster or doing something faster that you could have done yourself. It looks like a good deal to APG. How would you address that from sort of KPN investor point of view? Thank you.
Ulrich. I think it's a good question. I think it's an attractive deal for both of us. Look, two things. We're bringing indeed for the long tail of our plans, thereby reducing the churn risk. If you look at the churn risk of KPN, the biggest copper churn we have is in medium dense areas where we have copper and others roll out fiber. By bringing forward this business, you definitely dramatically reduce the churn risk and protect your KPN client base. That's one. Secondly, when you come to the JV, where do we make money? We make money as KPN by providing the active layer, which is a relatively high margin income stream, which is a scalable business. Secondly, we still own 50% of the JV, and we get a payment upfront. I think APG is an attractive long-term investment.
We also have, because we actually, as I said, we still own 50% of the JV. We get paid upfront a significant amount that crystallizes almost the future value. We protect the churn in these areas, which could be at risk of increasing over the coming years. If other players would roll out fiber, and we would only be able to roll out fiber at the end of this decade. It's a combination of the churn prevention, combination of the income stream through the active layer that we provide, and the third thing is the upfront payment. We feel the combination of that warrants doing this together with APG earlier than later on our own.
Got it. A big part is the land grab and capping the alternate opportunity so they don't have less blue water rather than.
Land grab is your words. That's not something I would use.
Yeah.
It is actually preventing churn and protecting your customer base that is actually very valuable to us.
Got it. Thank you.
The last question is from Ms. Siyi He Citi. Go ahead, please.
Thank you very much for taking my questions. Just want to have one, please. Just as always, today's announcement, you basically have a JV form to roll out additional one million homes and have the option to consolidate to have the majority of the stake. My question is, when you think about your existing fiber homes, and how do you think about potential structural options around your existing fibers? Does it change your previous view that it's important to own 100% of your fiber assets going forward? Thank you.
I would say, good question. We are still convinced that it's valuable to own 100% of the fiber assets. The 500,000 homes we roll out ourselves, we continue to roll out ourselves on our own balance sheet. We said we own 2.8 million homes today. We're adding about 2.5 million on our own balance sheet in the coming years. This is actually a additional plan set on top of that, with the aim of accelerating the rollout, bringing forward that long tail and reducing the churn. In principle, KPN prefers to hold on to assets, to own these assets ourselves. We just felt in this case, the combination of, as you said, churn prevention, acceleration, and the payment up front was a good alternative.
As a matter of structure, I wouldn't count on us now starting to sell fiber assets in a fire sale in the coming years. We still prefer to own this network ourselves. Even if we're very happy with the price that we received for this greenfield JV. It does show the value of our fiber network, it definitely does. At this point, strategy is to stay majority owner of fiber assets.
Thank you very much.
Okay, thank you. That concludes the call. If there's any further questions, please contact the IR team. Thank you very much.
Thank you.