KPN said Tuesday it is acquiring independent Dutch mobile operator Telfort for €980 million ($1.19 billion) to increase its presence in the low end of the market.

KPN is the top-ranked player in the Netherlands, with some 6.1 million mobile customers. Some 700,000 of Telfort’s 2.4 million subscribers buy their telephone minutes from MVNOs (mobile virtual network operators), which buy minutes of capacity from Telfort. About three-quarters of these plans are inexpensive, prepaid packages rather than annual subscriptions.

Netherlands

“This is really unusual,” said Emma Mohr-McClune, a wireless analyst with Current Analysis. “The market leader is buying a very inventive maverick that practically invented the wholesale market in the Netherlands.”

She added that while observers have long speculated that another company would buy Telfort, few expected it to be KPN.

Pending regulatory approval of the deal, KPN will also take on Telfort’s net operating losses of €900 million, giving the transaction a real value of €180 million. Depending on specific performance criteria, the acquisition price could increase by up to €140 million, according to the company.

The move should also help KPN develop new sources of revenue at a time when domestic competition among mobile carriers is fierce, without cannibalizing its own business.

KPN currently sells mobile phone services under the KPN name to consumer households and under the brand name Hi to teenagers. “This is a logical extension of their customer segmentation strategy,” added Ms. Mohr-McClune.

Although top ranked, KPN faces competition from four other Dutch players. Vodafone currently has 3.5 million subscribers, followed by Telfort (2.4 million), Orange (1.7 million), and T-Mobile Netherlands (1.5 million). That is hefty competition for a country with a population of only 16.3 million.

Orange

Although KPN managed to increase its domestic market share from 39.4 percent in the first quarter of 2004 to 40.7 percent in the first quarter of 2005, the cost of acquiring and maintaining customers was up 64 percent, pointed out Daniel Bieler, research director with Ovum.

That cost increase contributed to falling EBIDTA (earnings before interest, dividends, taxes, and amortization) margins at the company, which decreased from 42 percent in that period in 2004 to 34 percent this year.

“They are struggling to hold onto market share,” said Mr. Bieler. “It’s a totally overcrowded market.”

KPN’s subsidiary in Germany, E-Plus, faces similar competition.

Germany

Competing Globally

While the move may be good domestically, Ms. Mohr-McClune said KPN still needs to tackle the problem of how it can compete internationally. While KPN has subsidiaries in Germany and Belgium, competitor Vodafone has a much larger presence, with subsidiaries and joint ventures in Germany, Italy, the United Kingdom, the United States, and Asia.

Telfort has managed a successful turnaround over the past few years by focusing on the wholesale market, in which a known brand sells products from a mobile operator in a no-frills package to consumers. Examples of such models are Virgin Mobile in the U.K. and Tschibo in Germany.

Telfort has managed a successful turnaround over the past few years by focusing on the wholesale market, in which a known brand sells products from a mobile operator in a no-frills package to consumers. Examples of such models are Virgin Mobile in the .

Analysts believe more such deals are to come, as brand names reach out to new groups of consumers. “A few years ago, operators were stubborn about maintaining their brand profile,” said Ms. Mohr-McClune. “Now there is a recognition that your brand can’t speak to all sectors.”

Telfort works with nine different MVNOs, including Versatel, Transatel, and Debitel. Mr. Bieler said that E-Plus has also embraced this strategy, striking MVNO-type deals with Schwarzfunk and the launch of its own alternative brand, Simyo.

Formerly 02 Netherlands, Telfort was renamed in 2003, after the then-struggling carrier was sold to venture capital firm Greenfields Capital for €25 million.

Netherlands

In the 2004-2005 fiscal year, Telfort saw net sales of €509 million on EBITDA of €97 million. The losses that KPN is taking over are carry-forward losses related to startup costs such as marketing and network buildup, according to a KPN spokesman. Telfort has begun to write off these costs since it became profitable.