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Deutsche Telekom, Vodafone Say Greek Phone Merger Needed to Avert Failure

Deutsche Telekom AG and Vodafone Group Plc (VOD), having lost a combined $6.4 billion from their investments in Greece, are now pushing regulators to let mobile- phone companies merge to stay profitable as the country heads for a fifth year of recession.

More than two months since Vodafone started talks about a potential combination of its Greek unit with Wind Hellas Telecommunications SA, the companies have yet to reach an accord that can be put to regulators for approval. A merger of the wireless operators, Greece’s second- and third-largest, would create a duopoly with market leader Hellas Telecommunications SA, or OTE, which is 40 percent owned by Deutsche Telekom.

“If they don’t approve it, you’ll soon have another bankrupt company in the market,” OTE Chief Executive Officer Michael Tsamaz told a conference in Barcelona yesterday.

The Greek wireless market has been squeezed and consumers are wary that further government austerity measures to reduce the euro-zone’s biggest deficit will trim their spending power. OTE, with 7.9 million wireless customers, reported a 10 percent slump in revenue from those clients in the first nine months, while Vodafone, the world’s largest mobile-phone company, booked a 450 million-pound ($713 million) impairment loss from its Greek unit last quarter.

Delay?

A merger application from Vodafone and Wind Hellas is unlikely to be submitted to the European Commission until at least December, instead of October as planned, as negotiations drag on between Vodafone and U.S.-based Largo Ltd., which has a stake in Wind Hellas, Kathimerini reported yesterday.

“We think that through consolidation you can continue have a positive investment case,” Vodafone CEO Vittorio Colao said yesterday at the same conference, organized by Morgan Stanley. “Without consolidation, I’m not so sure.”

George Tsaprounis, a Wind Hellas spokesman, didn’t return a call seeking comment.

Vodafone, the Newbury, England-based operator with 4 million Greek customers as of the end of September, was the biggest purchaser of wireless spectrum in an auction this week. Cosmote, OTE’s wireless unit, and Wind Hellas also bought spectrum. Wind Hellas had 3.88 million wireless customers as of September 2010, according to the company’s most recent financial report available.

A merger of Vodafone and Wind Hellas would also help the companies to pool resources in the fixed-line network market. Wind Hellas owns the Tellas broadband network while Vodafone has a minority stake in Hellas Online.

Greek Bailout

“I prefer to have a market that’s less fragmented, with more dominant players,” OTE’s Tsamaz said. Such a market would be “more sure to have long- term profitability rather than having small ad-hoc operators who are only after increasing their subscribers just to be sold to a fund later.’

Prime Minister Lucas Papademos, who formed a government on Nov. 11 after four days of political wrangling, must implement budget measures and decisions related to a European bailout amounting to 130 billion euros ($175 billion), as well as manage a voluntary debt swap, by the end of February.

As the European debt crisis escalates, OTE told investors last week that it has moved cash not needed as working capital to international banks within and outside Greece.

A plan to merge Greece’s two main airlines, Aegean Airlines SA and Olympic Air SA, was blocked this year by European Union antitrust regulators, which said the deal would have created a “quasi-monopoly.”

Writedowns

Vodafone’s charge on the Greek unit last quarter came on top of the losses in the year-earlier period, when Vodafone cut the value of the operations by 800 million pounds.

Deutsche Telekom has spent about 4 billion euros on OTE since it started buying shares in the company in 2008. Its 40 percent stake in OTE has a market value of about 650 million euros. The Bonn-based company has also written down the value of the investments, and said this month that it’s checking whether more cuts in the operations’ book value are necessary.

To contact the reporters on this story: Cornelius Rahn in Barcelona via crahn2@bloomberg.net; Jonathan Browning in Barcelona via jbrowning9@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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