Carlos Slim, the world's richest man, has backed KPN's plan to raise 4 billion euros ($5.3 billion) and will take two board seats as he battles to turn around a losing investment in the Dutch telecommunications group.
However, the Mexican telecoms tycoon, whose America Movil owns just under 30 percent of KPN, said on Wednesday he would not launch a full takeover as it struggles with cut-throat competition and high investment costs. KPN shares slid over 9 percent to an 11-year low.
"The 4 billion euros they (KPN) are looking for is about the same size as their market capitalization. This confirms a highly dilutive capital increase," said a trader in Brussels. "The standstill agreement also removes takeover speculation."
The announcement was also a blow to America Movil shares, since Latin America's biggest phone company will have to invest a further 900 million euros in KPN to maintain its 29.77 percent stake.
American Movil shares fell more than 2 percent to 14.14 pesos in Mexican trading.
America Movil has already pumped about 3 billion euros into KPN, buying shares at mostly just below 8 euros as part of a drive to expand in Europe. The Mexican group also has a stake in Telekom Austria , which is underwater as well.
KPN shares have slumped - trading as low as 2.871 euros on Wednesday - as it battles with a heavy debt load and stiff competition and after paying much more than expected for a fourth-generation mobile license.
KPN, which announced earlier this month it planned to raise 4 billion euros in equity capital, said it would seek 3 billion euros via a rights issue. It will also offer hybrid securities.
A source close to the deal said KPN would need to sell about 2 billion euros of hybrids to hit its 4 billion euro target, as they are usually recognized as 50 percent equity.
KPN plans to use the proceeds to cut net debt of about 12 billion euros, and to continue investing in its operations.
The accord will put to rest, at least for a spell, investor concerns that America Movil would not support KPN as it seeks to rebuild its balance sheet, and calm speculation about a takeover.
It may not calm rumors that America Movil and other investors could one day push for broader management changes, including the dismissal of embattled Chief Executive Eelco Blok.
Asked whether management changes had been discussed between America Movil and KPN, a spokesman for the Dutch company declined to comment, and said no changes to the board of management were included in Wednesday's agreement.
An America Movil spokeswoman declined to comment on any possible management changes.
It will take two seats on KPN's eight-member supervisory board and the two companies will form joint working groups to advise KPN's board on operational and financial matters, KPN added.
The Dutch group reiterated they could also cooperate in areas such as joint procurement, international mobile roaming and international transit with the aim of reducing costs.
"America Movil was keen to ensure it had more concrete parameters for its relationship with KPN and to make sure it has more direct information and insight into what is going on in the company," the source close to the deal said. "It is a positive signal that America Movil ... is standing behind the company."
KPN said the agreement did not have an expiration date, but could be cancelled by either party with two months notice. KPN agreed it would not do so in the first two years.
The idea was also put off that Slim would take over all of KPN anytime soon. Credit analysts have long seen that as unlikely, given America Movil leverage levels.
"Consolidating the whole company and putting all that on its balance sheet at this stage would not be viewed favorably by America Movil shareholders," the source said.
America Movil, Latin America's biggest phone company, earlier this month reported weak fourth-quarter results that widely missed analysts' expectations, in part because of exchange losses related to its stakes in KPN and Telecom Austria.
The new capital raise by KPN is adding to downward pressure on America Movil's shares, analysts said. The shares have lost more than 4 percent year to date.
The new investment "is a large chunk of money," said Jorge Nevid, head trader at brokerage Accival in Mexico City. "After fourth-quarter results that were not in line with expectations, now the announcement they're putting more money into this company - something is not going well here."
Theodoor Gilissen analyst Jos Versteeg said Slim, whose net worth is estimated at $72 billion by Forbes magazine, might still end up taking over KPN in the longer term.
"What Slim has done in Latin America is take a stake, invest heavily and then take over the group completely," he noted.
America Movil already has de-facto control of KPN because of a traditionally low turnout at KPN shareholder meetings.
KPN said Deutsche Bank , Goldman Sachs and JP Morgan would underwrite the rights issue.
Companies generally have to pay higher interest rates on hybrid bonds, but credit rating agencies treat them as partially helping to improve debt ratios.
KPN shareholders will vote on the fundraising and on appointing the new board members on April 10. The rights issue is expected to be completed by mid-May, the source said, while the hybrid offering could be done at any time.
($1 = 0.7487 euros)
(Additional reporting by Philip Blenkinsop in Brussels, Leila Abboud in Paris, Kylie MacLellan in London, Elinor Comlay and Lorena Segura in Mexico City; Editing by Mark Potter, Kenneth Barry and Jeffrey Benkoe)