KKR can’t help but shop in the European telecommunications sector. The US venture capital giant’s latest deal covers just under half of a 52,000-kilometer fiber-optic cable network owned by Red Eléctrica (REE). He has already bought Masmóvil, taken a stake in the Dutch operator KPN and bet on Telecom Italia, which is worth 33,000 million euros. For stock market investors in this unloved sector, the message needs to be loud and clear.
Thursday’s deal highlights the value-seeking mentality of KKR and others like Patrick Drahi, the Franco-Israeli tycoon who this week increased his stake in Britain’s BT to 18%. KKR already owns 37.5% of FiberCop, the last mile of Telecom Italia’s broadband network that connects exchanges to homes. Its purchase in Spain, which operates the cables that run alongside rail and power lines, is more akin to the company’s backbone network.
REE’s infrastructure does not require the cumbersome and expensive process of excavating roads. This is reflected in the assessment. KKR pays 971 million euros for 49% of the business, which is 22 times the EBITDA of an asset it will not control. Drahi sold a whole similar asset in neighboring Portugal in 2019 at a multiple of 20 times.
In contrast, most last mile operations continue to require heavy investment to replace copper cables with fiber optic cables. BT, for example, is investing £ 15 billion (€ 18 billion) in modernizing its Openreach network. Still, KKR’s transactions suggest a disconnect from valuation. The venture capital firm’s investment in FiberCop was made at a multiple of less than 9 times ebitda. The unit’s parent company, Telecom Italia, trades less than 5 times.
BT potentially faces a similar mismatch. If valued at the same ebitda multiple as FiberCop, Openreach would be worth £ 26bn (€ 31bn), which is more than three-quarters of the UK company’s total value. If a Spanish style valuation is applied to your broadband backbone, BT’s stock value exceeds the current total.
One explanation is that stock market investors, who depend on the regular payment of dividends, are worried about the huge capex needs of telecommunications operators. The prospect of government intervention may also weigh on valuations. But when an investor like KKR sends such a strong message, the markets should pay more attention.