Telefonica to buy Germany’s E-Plus from KPN for $10.7 billion

Spanish operator Telefonica has agreed an €8.1 billion ($10.7 billion) takeover of E-Plus, the German mobile operator owned by KPN of the Netherlands.

By merging E-Plus with its own German subsidiary, Telefonica (Madrid, Spain) expects to become the largest operator in the country, overtaking both Deutsche Telekom (Bonn, Germany) and Vodafone (Dusseldorf, Germany).

The transaction is to be financed through a mixture of cash and stock in two phases but includes a total cash payment of €5 billion and a stake in the resulting company of 17.6%.

Spanish operator Telefonica has agreed an €8.1 billion ($10.7 billion) takeover of E-Plus, the German mobile operator owned by KPN of the Netherlands.

By merging E-Plus with its own German subsidiary, Telefonica (Madrid, Spain) expects to become the largest operator in the country, overtaking both Deutsche Telekom (Bonn, Germany) and Vodafone (Dusseldorf, Germany).

The transaction is to be financed through a mixture of cash and stock in two phases but includes a total cash payment of €5 billion and a stake in the resulting company of 17.6%.

In the first phase, Telefonica is to pay KPN (The Hague, Netherlands) €3.7 billion in cash and 24.9% of the combined entity, while in the second it will buy a 7.3% stake in the company for €1.3 billion.

That will leave Telefonica in control of 65% of the combined entity, giving KPN a 17.6% stake.

Remaining shares will be free float.

The Spanish operator expects to realize synergies of between €5 billion and €5.5 billion as a result of the tie-up.

By bringing together Germany’s third- and fourth-biggest players, the deal will create a new leader in the German market with about 43 million customers and a market share of approximately 38%, based on figures released for the three months ending March 2013.

Nevertheless, the combined company will still lag Deutsche Telekom and Vodafone when it comes to service revenue, with a market share of about 29% on this measure.

Telefonica and E-Plus have been trying to compete on price and, accordingly, reporting lower average revenue per user than their bigger rivals.

For that reason, the deal is likely to be welcomed – to some extent – by Deutsche Telekom and Vodafone, which will see an opportunity to grow service revenue following the absorption of one competitor into another.

Intense competition in Germany’s mobile market led to year-on-year service revenue declines for all four operators for the three months ending March 2013.

Telefonica says it expects to focus on mobile data and LTE development following the merger, and claims the tie-up will give it the best network in the country in terms of quality and distribution.

In terms of spectrum holdings, it will have a considerable advantage over both Deutsche Telekom and Vodafone, with vast resources in the 1800MHz and 2.1GHz bands.

Indeed, regulatory authorities – which have yet to give the green light to the deal – may well demand that Telefonica give up some of its frequencies as a condition of the merger.

Authorities in Austria and the UK made similar demands during recent merger activity.