Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

<ul>
<li>Since March we have consistently said we believe any bottoming process would likely take weeks or months and could come with more tests of the lows, or even an undercut.</li>
<li>We are testing the March lows now in several global indexes, including the MSCI ACWI (ACWI-US), ACWI ex-US (ACWX-US), and EM (EEM-US).</li>
<li>While this is a logical spot for a bounce, we see rallies as selling opportunities at the index level</li>
</ul>


Since March we have consistently said we believe any bottoming process would likely take weeks or months and could come with more tests of the lows, or even an undercut.
We are testing the March lows now in several global indexes, including the MSCI ACWI (ACWI-US), ACWI ex-US (ACWX-US), and EM (EEM-US).
While this is a logical spot for a bounce, we see rallies as selling opportunities at the index level


MSCI ACWI, ACWI Ex-US, EM Testing Logical Support; Actionable Themes: Defensives & Reopening Stocks

European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

<ul>
<li>KKR intends to offer €0.505/ordinary&amp;savings, a 44% premium and 5.2x EV/Fwd EBITDA. KKR is willing to split Telecom Italia, by separating the network (Infra Co) from the services (ServiceCo).</li>
<li>The attempt would need 67% of the ords float tendered and no interference from the Italian Government. The market is cautious, but believes this time can happen.</li>
<li>In light of the possible offer, I change my recommendation to long TIT IM, long TITR IM, TP 0.505/share. Gross spread is 10.5%. The premium savings/ordinary shares has decreased to 0.9%.</li>
</ul>


KKR intends to offer €0.505/ordinary&amp;savings, a 44% premium and 5.2x EV/Fwd EBITDA. KKR is willing to split Telecom Italia, by separating the network (Infra Co) from the services (ServiceCo).
The attempt would need 67% of the ords float tendered and no interference from the Italian Government. The market is cautious, but believes this time can happen.
In light of the possible offer, I change my recommendation to long TIT IM, long TITR IM, TP 0.505/share. Gross spread is 10.5%. The premium savings/ordinary shares has decreased to 0.9%.


KKR Potential Offer for The (W)Hole of Telecom Italia

On 30 July, Xavier Niel, co-founder and controlling shareholder of <a href="https://www.smartkarma.com/entities/iliad-sa" target="_blank" data-smartkarma-citation="entities:21486:1" rel="noopener">Iliad SA (ILD FP)</a> (70.63% of the share capital and 78.67% of the voting rights) launched a simplified public tender offer for the remaining iliad stake he does not own.
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<ul style="list-style-type: disc;">
<li>
The offer price will be €182/share, a premium of 61.0% on the closing share price on the prior trading session, c. 50% premium to the 1-month VWAP and 52.7% to the 3-month VWAP.
</li>
<li>
This offer for the remaining 29.37% signals Niel's belief that iliad is undervalued, as per the typical “From now on, a new phase of development for Iliad will require quicker transformations and significant investments that will be easier to carry out as a private company,” Niel said in a statement. “Our ambition for Iliad is to accelerate to become a leader in telecommunications in Europe.”
</li>
<li>
Niel had previously boosted its stake in 2019 by buying at €120/share as the stock stagnated at nearly half its all-time highs.
</li>
<li>
It is a similar move to that carried out by Patrick Drahi, when he took private Altice Europe (see <a href="https://www.smartkarma.com/insights/altice-next-private-takeover-announcement" target="_blank" data-smartkarma-citation="insights:43240" rel="noopener">Altice - Next Private Takeover Announcement</a> and <a href="https://www.smartkarma.com/insights/altice-next-private-trading-above-terms" target="_blank" data-smartkarma-citation="insights:45873" rel="noopener">Altice - Next Private: Trading Above Terms</a>), because of low valuations of European telecoms. Private equity has been circling <a href="https://www.smartkarma.com/entities/koninklijke-kpn-nv" target="_blank" data-smartkarma-citation="entities:21122:1" rel="noopener">Koninklijke KPN (KPN NA)</a> and KKR (in a consortium) has taken over <a href="https://www.smartkarma.com/entities/masmovil-ibercom-sa" target="_blank" data-smartkarma-citation="entities:29013:1" rel="noopener">Masmovil Ibercom SA (MAS SM)</a> and indirectly it is acquiring <a href="https://www.smartkarma.com/entities/euskaltel-sa" target="_blank" data-smartkarma-citation="entities:21263:1" rel="noopener">Euskaltel SA (EKT SM)</a>.
</li>
<li>Niel has bridge financing which should be comfortably refinanced with high-yield debt. He will be receiving c. €178 mn in dividends from FY2021e.</li>
</ul>
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Since November 2020, iliad's shares have lost nearly a third of their value, both on investor concerns about investments in Italy and price wars in France. European telecoms will also need to carry out significant capex for the 5G deployment and upgrade networks to high-speed fibre.
This is essentially an opportunistic bid, as Xavier Niel thinks the market is undervaluing his company, coupled with the planned Capex investments. This is not too disimilar to the <a href="https://www.smartkarma.com/entities/kaz-minerals-plc" target="_blank" data-smartkarma-citation="entities:21999:1" rel="noopener">KAZ Minerals (KAZ LN)</a> takeout offer.
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iliad has growth ambitions in Poland  to become a convergent player and on 30 July submitted an indicative bid to fully acquire <span title="" data-toggle="tooltip" data-offset="10%" data-trigger="manual" data-html="true" data-container="body" data-template='&lt;div class="tooltip" role="tooltip"&gt;&lt;div class="news-article-tooltip-arrow tooltip-arrow"&gt;&lt;/div&gt;&lt;div class="tooltip-inner"&gt;&lt;/div&gt;&lt;/div&gt;' data-original-title="">Liberty-Global-owned <span title="" data-toggle="tooltip" data-offset="10%" data-trigger="manual" data-html="true" data-container="body" data-template='&lt;div class="tooltip" role="tooltip"&gt;&lt;div class="news-article-tooltip-arrow tooltip-arrow"&gt;&lt;/div&gt;&lt;div class="tooltip-inner"&gt;&lt;/div&gt;&lt;/div&gt;' data-original-title="">UPC Poland. The indicative bid values the Polish operator at 7.3 billion Polish zlotys. iliad said the valuation is based on EBITDA of 782 million zlotys this year for UPC Poland. iliad is debating whether to acquire a broadband operator in the Polish market, or establishing its own broadband company to deploy optic fiber technology in Poland. This follows on the September 2020 acquisition of <a href="https://www.smartkarma.com/entities/play-communications-sa" target="_blank" data-smartkarma-citation="entities:29661:1" rel="noopener">Play Communications SA (1P1 GR)</a> for €3.5 billion (<a href="https://www.smartkarma.com/insights/play-communications-iliad-offer-announcement" target="_blank" data-smartkarma-citation="insights:43457" rel="noopener">Play Communications - Iliad: Offer Announcement</a>).
The takeout and delisting of iliad represents an opportunity for Xavier Niel. The 5G capex schedule   and fiber broadband upgrades will require heavy investments that are discouraging investors from increasing positions in reportedly cheap European telcos. At the same time, it has been the large American tech companies that have reaped the benefits of the higher internet traffic.
The offer represents c. 4.9% CF yield and the shares are trading at c. 6.5x on 2021E EV/EBITDAaL. Although the offer is interesting, and will likely receive majority of acceptances, my estimate of fair value (DCF based) is €190.7/share, which represents a 4.7% upside to the offer price. Market seems to await a sweetened bid. On this basis, and considering the risk/reward, my recommendation is Long ILD FP.
iliad's shares closed, on 30 July, 61% higher at €182.05, just above the offer price, giving it a market cap of c. €10.85b n.
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<div></div>
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On 30 July, Xavier Niel, co-founder and controlling shareholder of Iliad SA (ILD FP) (70.63% of the share capital and 78.67% of the voting rights) launched a simplified public tender offer for the remaining iliad stake he does not own.



The offer price will be €182/share, a premium of 61.0% on the closing share price on the prior trading session, c. 50% premium to the 1-month VWAP and 52.7% to the 3-month VWAP.


This offer for the remaining 29.37% signals Niel's belief that iliad is undervalued, as per the typical “From now on, a new phase of development for Iliad will require quicker transformations and significant investments that will be easier to carry out as a private company,” Niel said in a statement. “Our ambition for Iliad is to accelerate to become a leader in telecommunications in Europe.”


Niel had previously boosted its stake in 2019 by buying at €120/share as the stock stagnated at nearly half its all-time highs.


It is a similar move to that carried out by Patrick Drahi, when he took private Altice Europe (see Altice - Next Private Takeover Announcement and Altice - Next Private: Trading Above Terms), because of low valuations of European telecoms. Private equity has been circling Koninklijke KPN (KPN NA) and KKR (in a consortium) has taken over Masmovil Ibercom SA (MAS SM) and indirectly it is acquiring Euskaltel SA (EKT SM).

Niel has bridge financing which should be comfortably refinanced with high-yield debt. He will be receiving c. €178 mn in dividends from FY2021e.


Since November 2020, iliad's shares have lost nearly a third of their value, both on investor concerns about investments in Italy and price wars in France. European telecoms will also need to carry out significant capex for the 5G deployment and upgrade networks to high-speed fibre.
This is essentially an opportunistic bid, as Xavier Niel thinks the market is undervaluing his company, coupled with the planned Capex investments. This is not too disimilar to the KAZ Minerals (KAZ LN) takeout offer.


iliad has growth ambitions in Poland  to become a convergent player and on 30 July submitted an indicative bid to fully acquire Liberty-Global-owned UPC Poland. The indicative bid values the Polish operator at 7.3 billion Polish zlotys. iliad said the valuation is based on EBITDA of 782 million zlotys this year for UPC Poland. iliad is debating whether to acquire a broadband operator in the Polish market, or establishing its own broadband company to deploy optic fiber technology in Poland. This follows on the September 2020 acquisition of Play Communications SA (1P1 GR) for €3.5 billion (Play Communications - Iliad: Offer Announcement).
The takeout and delisting of iliad represents an opportunity for Xavier Niel. The 5G capex schedule   and fiber broadband upgrades will require heavy investments that are discouraging investors from increasing positions in reportedly cheap European telcos. At the same time, it has been the large American tech companies that have reaped the benefits of the higher internet traffic.
The offer represents c. 4.9% CF yield and the shares are trading at c. 6.5x on 2021E EV/EBITDAaL. Although the offer is interesting, and will likely receive majority of acceptances, my estimate of fair value (DCF based) is €190.7/share, which represents a 4.7% upside to the offer price. Market seems to await a sweetened bid. On this basis, and considering the risk/reward, my recommendation is Long ILD FP.
iliad's shares closed, on 30 July, 61% higher at €182.05, just above the offer price, giving it a market cap of c. €10.85b n.




Xavier Niel/Iliad: An Offer Shareholders Can't Refuse?

On 7 April, The Wall Street Journal reported that <a href="https://www.smartkarma.com/entities/eqt-ab" target="_blank" data-smartkarma-citation="entities:28922:1" rel="noopener">EQT AB (EQT SS)</a> and Stonepeak Infrastructure Partners LP are preparing a joint bid for <a href="https://www.smartkarma.com/entities/koninklijke-kpn-nv" target="_blank" data-smartkarma-citation="entities:21122:1" rel="noopener">Koninklijke KPN (KPN NA)</a>. Market rumours put the offer price at €3 per share. On 8 April, 55 million shares of KPN were traded.
On October 12, KPN shares shot up 10% amid rumors of a possible EQT takeover. KPN was then trading at €2.4 per share. KPN has a protection mechanism against takeover bids (Stichting), and the Dutch government has the right to veto offers, as it considers that the telecommunications network is critical infrastructure. Both are discussed in <a href="https://www.smartkarma.com/insights/k-p-n-e-q-t-prospective-private-equity-bid" target="_blank" data-smartkarma-citation="insights:44129" rel="noopener">K P N - E Q T: Prospective Private Equity Bid</a>. Carlos Slim (through <a href="https://www.smartkarma.com/entities/america-movil-sab-de-cv" target="_blank" data-smartkarma-citation="entities:24634:1" rel="noopener">America Movil Sab De Cv (AMXL MM)</a>) owns a 20% stake in KPN.
KPN has had a good run and gone over my TP from October, on a return to growth basis (see Capital IQ projections further in the next section), with M&amp;A optionality.
KPN has a strong management to run a mature business like the Dutch fixed line/fibre network operations. KPN Dutch's operations are efficiently run, with stable CF and estimated EBITDA margins above 45% for the period 2021e-2023e, in one of the most competitive and mature Telecom markets in Europe. KPN and Vodafone-Zigo are the top players, with T-Mobile the third major player.
Using Capital IQ consensus numbers, a 7.6x EV/EBITDA exit multiple, an acquisition premium of 10% to last closing price (€2.919 per share), an equity portion of 25% and spread of 250bps to 10-year Euro swap rates, I think an offer price of €3.212 could generate an IRR of 10.7% by year 8. And that is probably the bare minimum that the Board of KPN will be willing to discuss. Carlos Slim failed, EQT would not like history repeating itself.
On this basis, recommendation is long KPN, TP €3.211.
Shares should be sustained by a 4.7% dividend yield.

On 7 April, The Wall Street Journal reported that EQT AB (EQT SS) and Stonepeak Infrastructure Partners LP are preparing a joint bid for Koninklijke KPN (KPN NA). Market rumours put the offer price at €3 per share. On 8 April, 55 million shares of KPN were traded.
On October 12, KPN shares shot up 10% amid rumors of a possible EQT takeover. KPN was then trading at €2.4 per share. KPN has a protection mechanism against takeover bids (Stichting), and the Dutch government has the right to veto offers, as it considers that the telecommunications network is critical infrastructure. Both are discussed in K P N - E Q T: Prospective Private Equity Bid. Carlos Slim (through America Movil Sab De Cv (AMXL MM)) owns a 20% stake in KPN.
KPN has had a good run and gone over my TP from October, on a return to growth basis (see Capital IQ projections further in the next section), with M&amp;A optionality.
KPN has a strong management to run a mature business like the Dutch fixed line/fibre network operations. KPN Dutch's operations are efficiently run, with stable CF and estimated EBITDA margins above 45% for the period 2021e-2023e, in one of the most competitive and mature Telecom markets in Europe. KPN and Vodafone-Zigo are the top players, with T-Mobile the third major player.
Using Capital IQ consensus numbers, a 7.6x EV/EBITDA exit multiple, an acquisition premium of 10% to last closing price (€2.919 per share), an equity portion of 25% and spread of 250bps to 10-year Euro swap rates, I think an offer price of €3.212 could generate an IRR of 10.7% by year 8. And that is probably the bare minimum that the Board of KPN will be willing to discuss. Carlos Slim failed, EQT would not like history repeating itself.
On this basis, recommendation is long KPN, TP €3.211.
Shares should be sustained by a 4.7% dividend yield. 

K P N - E Q T Consortium: Prospective Bid (II)

Shares of <a href="https://www.smartkarma.com/entities/koninklijke-kpn-nv" target="_blank" data-smartkarma-citation="entities:21122:1" rel="noopener">Koninklijke KPN (KPN NA)</a> closed on Monday 12 October c. 7% higher vs. the previous trading session, the highest level in three months, after Bloomberg News reported on Friday that EQT was considering a potential takeover bid.
<ul>
<li>EQT was said to be in early discussions with advisers on a deal, without any final decision having been made.</li>
<li>Both KPN and EQT declined to comment on the report.</li>
<li>KPN shares had lost 17% since the start of the year until Friday.</li>
</ul>
Given the depressed valuations of telco companies in Europe, the move by EQT is unsurprising, in my view.
KPN has a strong takeover protection against unwanted suitors. It can issue B-shares (preference shares) with the same voting right of KPN A-shares (ordinary shares) as a takeover defense. I believe that, if made, any bid approach should be agreed with KPN’s management in order to avoid higher dilution in KPN’s share capital.
In addition to the poison pill already mentioned, a deal could be blocked by the Dutch government using a law adopted this year that gives the government the option to block takeovers of Dutch telecom companies if they are deemed a threat to national security (source Reuters).
I believe that KPN is an ideal target for Private Equity.
<ul>
<li>KPN is the largest fixed line and mobile operator in the Netherlands (30% market share).</li>
<li>Has strong free cash flows and predictable revenue streams</li>
<li>Has the management capable to efficiently run a mature business</li>
</ul>
Using Capital IQ consensus numbers, a 7.6x EV/EBITDA exit multiple, an acquisition premium of 15% to last closing price (€2.4 per share), an equity portion of 25% and spread of 250bps to 10-year Euro swap rates, I think an offer price of €2.76 could generate an IRR of 13.1% by year 8 (see table below).
On a valuation basis, KPN does not appear expensive, plus there is the upside of a takeover bid. Recommendation is LONG KPN, target price €2.76.

Shares of Koninklijke KPN (KPN NA) closed on Monday 12 October c. 7% higher vs. the previous trading session, the highest level in three months, after Bloomberg News reported on Friday that EQT was considering a potential takeover bid.

EQT was said to be in early discussions with advisers on a deal, without any final decision having been made.
Both KPN and EQT declined to comment on the report.
KPN shares had lost 17% since the start of the year until Friday.

Given the depressed valuations of telco companies in Europe, the move by EQT is unsurprising, in my view.
KPN has a strong takeover protection against unwanted suitors. It can issue B-shares (preference shares) with the same voting right of KPN A-shares (ordinary shares) as a takeover defense. I believe that, if made, any bid approach should be agreed with KPN’s management in order to avoid higher dilution in KPN’s share capital.
In addition to the poison pill already mentioned, a deal could be blocked by the Dutch government using a law adopted this year that gives the government the option to block takeovers of Dutch telecom companies if they are deemed a threat to national security (source Reuters).
I believe that KPN is an ideal target for Private Equity.

KPN is the largest fixed line and mobile operator in the Netherlands (30% market share).
Has strong free cash flows and predictable revenue streams
Has the management capable to efficiently run a mature business

Using Capital IQ consensus numbers, a 7.6x EV/EBITDA exit multiple, an acquisition premium of 15% to last closing price (€2.4 per share), an equity portion of 25% and spread of 250bps to 10-year Euro swap rates, I think an offer price of €2.76 could generate an IRR of 13.1% by year 8 (see table below).
On a valuation basis, KPN does not appear expensive, plus there is the upside of a takeover bid. Recommendation is LONG KPN, target price €2.76.

K P N - E Q T: Prospective Private Equity Bid

Netherlands

Koninklijke KPN NV provides telecommunications services throughout the Netherlands.  The Company provides local, long distance, international, and mobile telecommunications services, voice-mail, call forwarding, ISDN Internet lines, faxing, and communications services for businesses and individuals.  KPN offers mobile telecommunications through E-Plus in Germany and BASE in Belgium.

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Koninklijke KPN (KPN NA)

MSCI ACWI, ACWI Ex-US, EM Testing Logical Support; Actionable Themes: Defensives & Reopening Stocks

We are testing the March lows in several global indexes, including the MSCI $ACWI, ACWI ex-US $ACWX, and EM $EEM. While this is a logical spot for...

Vermilion Research

KKR Potential Offer for The (W)Hole of Telecom Italia

In light of the possible offer, I change my recommendation to Long TIT IM, long TITR IM, TP 0.505/share. Additional upside could come from a...

Jesus Rodriguez Aguilar

Xavier Niel/Iliad: An Offer Shareholders Can't Refuse?

Although the offer will likely receive majority of acceptances, my TP is €190.7, a 4.7% upside to the offer. Market awaits a sweetened bid....

Jesus Rodriguez Aguilar

K P N - E Q T Consortium: Prospective Bid (II)

KPN is back to growth and well-run. On a 7.6x EV/EBITDA exit, 10% acquisition premium of 10%, 25% equity and spread of 250bps to 10-y € swap, an...

Jesus Rodriguez Aguilar

K P N - E Q T: Prospective Private Equity Bid

KPN is an ideal private equity target due to its strong free cash flows and predictable revenue streams. An offer price of €2.76 could generate an...

Jesus Rodriguez Aguilar

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