June 1 (Bloomberg) -- Royal KPN NV and Telefonica SA are considering ways to merge their German units, a move that would create the country’s top mobile-phone operator by customers.
The companies are evaluating a variety of options, including a combination of Telefonica’s O2 Germany unit and KPN’s E-Plus, the two smaller of the nation’s four operators, said two people with knowledge of the matter, declining to be identified as the discussions are private. The companies are considering selling a stake in a German entity as part of an initial public offering, one of the people said.
A merger could help KPN, which said today it had begun a strategy review of E-Plus, to fend off an unsolicited 2.6 billion-euro ($3.2 billion) offer for a stake by Carlos Slim’s America Movil SAB. Telefonica this week received approval from its board to hold an initial share sale for O2 Germany as the Madrid-based company speeds up attempts to cut its net debt of more than 57 billion euros.
“The combination would create significant synergies,” said Henri Alexaline, a fixed-income investor who helps manage $1 billion at London-based FM Capital Partners Ltd. “The key hurdle would be how to remedy antitrust concerns but looking at Vodafone’s current reach it does not look like a deal breaker.”
O2 Germany and E-Plus would have a combined mobile-phone client base of 41.7 million in the country, based on information from the company’s websites. That compares with Vodafone Group Plc’s 36.5 million local mobile customers and Deutsche Telekom AG’s 35.1 million wireless clients in Germany.
KPN acting Chief Financial Officer Eric Hageman said today that consolidation in the German market could generate 4 billion euros in synergies. Chief Executive Officer Eelco Blok said as recently as in November that Telefonica was “not willing” to sell. He declined to comment today on whether KPN is in talks with Telefonica.
“A combination of businesses of some kind would make a lot of sense,” said Francisco Salvador, a Madrid-based strategist at FGA/MG Valores. “It would boost the operators’ market share and would allow them to obtain significant synergies while ruling out any potential problems with licenses to offer services in the country.”
Telefonica, whose stock is down 33 percent this year, last week had it debt rating cut by Standard & Poor’s as the Spanish banking crisis accelerated the company’s loss of phone customers to discounters.
KPN rose 0.1 percent to 7.65 euros in Amsterdam after earlier surging as much as 2.1 percent. Telefonica rose 0.8 percent to 9 euros in Madrid. The Spanish operator has a market value of 41.4 billion euros, compared with 110 billion euros in 2007.
A spokesman for Telefonica declined to comment on whether the companies are considering combining their German businesses.
America Movil this week began a 2.6 billion-euro offer to increase its stake in The Hague, Netherlands-based KPN. Telefonica’s finance chief, Angel Vila, told an investor conference in London yesterday that Telefonica has no plan to make a counter bid for KPN, according to two people who attended the meeting, who asked not to be identified because the meeting is private.
Telefonica CEO Cesar Alierta, with his company’s net debt greater than its market value, is turning to some of Telefonica’s most valuable assets for cash.
Alierta bought mobile-phone operator O2 Plc for $31.5 billion in 2006 to add wireless units in the U.K., Ireland and Germany in his biggest acquisition. Germany is now Telefonica’s second-largest market in Europe and may be valued at as much as 9 billion euros, according to Citigroup Inc.
KPN had 23 million mobile customers in Germany at the end of the first quarter. Frank Claassen, an analyst at Rabobank International, estimates E-Plus is worth about 8.5 billion euros, though with cost savings through a merger, that could rise to 10 billion euros.
Telefonica said this week it will explore share sales for O2 Germany and its Latin American businesses. The prospect of owning a minority stake in the No. 3 of four mobile operators in Germany, a market with more handsets than people, has left investors unconvinced.
Boris Boehm, who helps manage 1.1 billion euros including Telefonica shares at Aramea Asset Management in Hamburg, says the IPO plans aren’t helped by the fact that the operator’s need for cash is too obvious.
“If everyone knows that Telefonica needs money out of the IPO, I would say it’s not a wise idea,” he said, adding that he wouldn’t be interested in buying O2 Germany’s stock. “It’s like in a poker game, if everyone knows what your cards are, it’s not a good game to play.”
German mobile-phone subscriptions rose 4.8 percent in 2011, compared with growth of 5.6 percent in all of Europe, according to data compiled by Bloomberg Industries. Wireless penetration reached 139 percent in 2011 compared with 130.3 percent for the region.
Heinrich Ey, a fund manager at Allianz Global Investors in Frankfurt, which manages about 300 billion euros including Telefonica and Deutsche Telekom shares, said the Spanish company had to “rush and react” after S&P’s cut and Slim’s KPN bid.
“The big question down the road is on consolidation,” he said.
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