Last Friday, news broke that Brookfield Asset Management was speaking to Dutch pension funds to try and engineer a takeover of KPN, the Dutch telephony company. This follows a move by Macquarie last year to achieve a similar deal to buy TDC (a Danish telecom company), with Danish pension funds.

No formal bid has been seen, but KPN was subject to a bid in 2013 from America Movil. This was prevented by the KPN Foundation (or ‘Stichting’) which controlled voting rights.

If Brookfield followed a similar approach to that used to take TDC private, it would mean increasing the leverage of KPN and a likely move into junk bond status. Most bonds include a change of control clause which would be triggered on this presumed downgrade to high yield, meaning bonds could be called or put at par. This should lead to a “pull to par” move for bonds, with consequent mark-to-market gains/losses depending on where the price was before the news broke.

KPN also has hybrid capital with fixed call dates. Any bid would likely lead to the hybrids being called at the first opportunity to avoid a 5% increase in coupons.

Whether Friday’s news was a “cheap” attempt to gauge the attitude of the Stichting, KPN management, and the Dutch public to a deal, or whether it was a genuine leak, the news may prompt other players to look at whether there could be value in a deal. America Movil is unlikely to want to buy, as it now holds its stake as a financial investment, but it will not be an uninterested bystander. The final ownership of KPN remains uncertain and will make for more volatility in bond prices.

It could provoke interest from others such as Deutsche Telekom, although they may need to exit their recent joint venture with Tele2. Macquarie might also be interested if it thinks it has been successful in Denmark.

Bonds are likely to be volatile, depending on how the story develops, and this may present opportunities to play the technicalities of the bond documentation.

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