America Movil SAB (AMXL) and Telefonica SA (TEF) set aside years of rivalry in Latin America to salvage an $11 billion transaction in Germany, one of the biggest wireless mergers attempted in Europe in recent years.
Billionaire Carlos Slim’s America Movil said today it will support Telefonica’s purchase of Royal KPN NV’s E-Plus unit after the Spanish carrier sweetened its bid by at least 450 million euros ($602 million). Representatives at America Movil, which owns about 30 percent of KPN, and Madrid-based Telefonica held talks last week before agreeing on the revised terms over the weekend, said four people familiar with the matter, asking not to be identified because the deliberations are confidential.
At stake is $7 billion in potential savings and extra revenue from a merger of E-Plus with Telefonica Deutschland Holding AG (O2D) to create a carrier with more than 43 million clients in Europe’s largest economy. Telefonica, led by Chief Executive Officer Cesar Alierta, and KPN (KPN) didn’t secure America Movil’s backing before announcing the transaction on July 23, triggering Slim to bid for KPN shares he didn’t own, people familiar with the matter said this month.
“It’s surprising how Telefonica and KPN have turned around a deal that was almost headed for collapse after Slim´s takeover bid for the Dutch company,” said Francisco Salvador, a strategist at FGA/MG Valores in Madrid. “It’s good news for Telefonica, and definitely great for its German unit, because otherwise it would have been left with no options to grow.”
Under the revised terms announced today, KPN will get 20.5 percent in the enlarged German entity, up from 17.6 percent initially agreed. Telefonica also gets an option to buy a 2.9 percent stake in the German business from KPN for 510 million euros after a year. KPN will also receive 5 billion euros of cash, as originally agreed.
KPN, based in the Hague, Netherlands, didn’t take part in the latest negotiations, according to people familiar with the matter. Telefonica directors signed off the revised terms unanimously at a meeting yesterday, a person familiar with the matter said. Slim and Alierta didn’t meet to discuss this deal, one person said.
While KPN shareholders will still have to vote on the merger at a meeting Oct. 2, Slim’s support removes a major obstacle, leaving antitrust approval as the next hurdle, the people said.
KPN rose 3 percent to 2.33 euros at the close of trading in Amsterdam, valuing the company at 9.9 billion euros. Telefonica added 0.2 percent in Madrid, while its German division gained 2.9 percent in Frankfurt. America Movil was little changed in Mexico City.
In a statement, America Movil said it’s committed to its 2.40 euro-a-share offer for the KPN stock it doesn’t own. Representatives at America Movil and Telefonica declined to comment on details of the talks that led to the revised pact. Stefan Simons, a spokesman at KPN, also declined to comment.
This isn’t the first time Slim, 73, has sparred with Alierta, 68, over European assets. In 2007, Alierta thwarted the America Movil chairman’s attempt to buy a stake in Telecom Italia SpA.
Last year, Alierta failed to block Slim from winning a 28 percent stake in the former Dutch phone monopoly by trying to buy those shares and combine their German businesses, a person familiar with the matter said at the time. Credit-rating companies warned Telefonica that it could be downgraded to junk if the company were to take on any more debt, scuttling the talks, the person said.
Alierta’s and Slim’s fiercest rivalry takes place in Latin America, where their companies are the two biggest providers of mobile-phone services. They have competed with each other for more than a decade in countries such as Brazil, Mexico, Argentina and Colombia.
This time, Telefonica and America Movil were able to resolve differences in valuation, agreeing to co-own a wireless carrier to gain more clout to compete with Vodafone Group Plc (VOD) and Deutsche Telekom AG. (DTE)
E-Plus and Telefonica Deutschland, which sells services under the O2 brand, together would have a customer base of 43.8 million as of June, surpassing Vodafone Group Plc’s 32.2 million and Deutsche Telekom AG’s 37.5 million, according to data compiled by Bloomberg Industries. Counting revenue, Telefonica Deutschland and E-Plus together remained smaller than Deutsche Telekom’s T-Mobile and Vodafone.
“If the European competition authority stops this deal it would send a really negative signal to the industry about the chances of further consolidation,” said Malte Raether, an analyst at Warburg Research in Hamburg. “If we see authorities only asking for minor remedies to the deal, it may have more of a positive effect on any European market consolidation going forward.”
Germany and the Netherlands have emerged as hot spots for telecommunications mergers and acquisitions. Regulators are considering Vodafone’s $10 billion agreement to buy Kabel Deutschland Holding AG. (KD8) John Malone’s Liberty Global Plc last month increased its stake in Dutch cable provider Ziggo NV. (ZIGGO)
In 2009, Deutsche Telekom and France Telecom SA agreed to merge their U.K. units to create the country’s largest mobile carrier.
America Movil, which has lost money from its investments in KPN and Telekom Austria AG (TKA), said it plans to keep KPN’s headquarters in The Hague. It will also keep KPN’s stock listed in Amsterdam, unless it obtains 95 percent or more of the company. America Movil also said it would keep the KPN brand and investigate expansion investments. Slim last year bid 8 euros a share for KPN shares.
Robin Bienenstock, a Sanford C. Bernstein analyst, said today KPN management and shareholders should try to fight for better terms from Slim’s bid.
“With their remaining operations undervalued by the America Movil offer it is reasonable to expect the KPN board to fight for a better valuation,” Bienenstock wrote in a note. “We think investor attention should now turn to Telekom Austria and that America Movil’s European strategy is not yet complete.”