Telefonica to acquire KPN's German unit E-Plus in €5-bn deal

Dutch telecom company Royal KPN NV today agreed to sell its E-Plus to Telefonica Deutschland in a cash and stock deal that values its German mobile-phone unit in a €5 billion ($6.5 billion) cash and stock deal.

Telefonica Deutschland, a subsidiary of Spanish telecoms giant Telefonica SA, will pay KPN €5 billion in cash and a 17.6-per cent stake in the merged company.

The financial part of the deal will be completed in two stages. In the first stage, Frankfurt Stock Exchange-listed Telefonica Deutschland will make an initial payment of €3.7 billion in cash and a give KPN a 24.9-per cent stake in the merged company, of which it will buy back 7.3 per cent from KPN for €1.3 billion in the second stage.

Telefónica will finally hold a 65-per cent stake in the new company, while KPN will hold 17.6 per cent and the remaining 17.4 per cent will be free float.

The cash payment will be financed via a €3.7-billion rights issue underwritten by Telefónica Deutschland in which Telefónica SA will subscribe €2.84 billion, in proportion to its current 76.8 per cent stake in the company.

The deal has the backing of KPN's largest shareholder America Movil, the Mexican telecom group controlled billionaire Carlos Slim.

Both companies expect the transaction to generate synergies and revenue additions of between €5 billion and €5.5 billion through combined distribution, customer service and network services, after deducting for ''integration costs.''

Telefonica and KPN had come close to a deal last year, but talks on merging O2 with KPN's E-Plus fell apart because of differences in valuation.

The transaction would see Telefonica Germany's O2 brand merge with E-Plus to become the new leader in the German mobile market with 43 million mobile customers, a 38 per cent market share, and combined revenues of €8.6 billion.

Munich-based Telefonica Germany is the fourth-largest mobile operator providing mobile telecom and mobile data services based on the GPRS, UMTS and LTE technologies through its brand O2.

As on 31 March 2013, it had 25.4 million customers, while current market leaders, T-Mobile has 38 million subscribers and Vodafone 37 million.

''The combination of E-Plus and Telefónica Deutschland will establish a mobile operator with attractive synergy and growth potential in Europe's largest economy,'' KPN's chief executive, Eelco Blok, said in a statement.

The deal may not add more debt to Madrid-based Telefonica, which in recent years has been selling assets with the goal of bringing its net debt below €47 billion in 2013.

Since 2011, it sold its Central American assets to Guatemala's CMI for $500 million, disposed off its Atento call centre to US private equity firm Bain Capital for $1.3 billion, its stake in China Unicom for $1.4 billion, its UK broadband and fixed telephony business to BSkyB for $270 million, and last month agreed to sell its O2 Irish business to Hutchison Whampoa Ltd's wireless communication unit called Three, for $1 billion.

As a result of the several divestures, the company has reduced net debt by approximately €10 billion since June 2012, including the recently announced disinvestments.

Telefónica reiterated its objective to reduce net debt below €47 billion by the end of 2013.

The transaction has to be approved by German and European regulators, who will have a close look at the deal.

Telefónica Deutschland will pay €100 million as break-up fee in case the regulators authorities do not approve the deal.

(Also see: Telefonica in talks to buy KPN's German mobile-phone business E-Plus)