July 2 (Bloomberg) -- Telefonica SA won European Union approval to merge its German unit with Royal KPN NV’s E-Plus after it pledged to bolster smaller rivals and divest spectrum, the European Commission said.
Telefonica must sell as much as 30 percent of the merged carrier’s network capacity to one or several virtual operators before it can close the takeover, EU regulators said in a statement today. The merged company must also offer to sell spectrum and assets to a potential new entrant to the market or to help virtual operators expand. It will also extend existing wholesale access deals.
The EU decision caps almost a year of uncertainty for Telefonica’s 8.55 billion-euro ($11.7 billion) takeover of E-Plus. The deal creates Germany’s largest wireless carrier by customers, with 45 million connections, ahead of Deutsche Telekom AG and Vodafone Group Plc. It also removes E-Plus as a competitive force that led on price cuts and innovations over the last decade.
Telefonica’s concessions mean “the deal no longer poses competition concerns,” Joaquin Almunia, the EU’s antitrust chief, said at a press conference. “Now the three mobile operators will have more or less the same market share and the same strength” in Germany.
The acquisition is Telefonica’s biggest since its $31 billion takeover of O2 Plc in 2005. The merged company will extend existing wholesale agreements until 2025, Telefonica Deutschland said in a statement. To enable a potential entry to the German market, the company will also offer 2.1 gigahertz and 2.6 GHz frequencies, mobile sites and national roaming to an interested party, it said.
Telefonica Deutschland rose 2 percent to 6.24 euros at 5:15 p.m. in Frankfurt, the second-biggest gain in the 23-company Bloomberg Europe Telecommunication Services Index today. Its parent company slipped 1.1 percent in Madrid and KPN declined 2.2 percent in Amsterdam.
While the EU approval is an important step in consolidating the German market, the concessions are insufficient, Niek-Jan van Damme, head of Deutsche Telekom’s German operations, said in a statement. Bolstering operators that don’t own physical networks gives them an advantage and doesn’t help the roll-out of broadband infrastructure, he said.
Van Damme also recommended that the enlarged company should cede some spectrum in the 1.8 GHz and 2.1 GHz bands, where it would have more than 60 percent of the total.
Telefonica and E-Plus said they expect the transaction to be settled in the third quarter. Thorsten Dirks, currently the head of E-Plus and a member of KPN’s management board, will become Telefonica Deutschland’s new CEO, the company said in a statement.
The deal “will allow us to pay a sustainable and growing dividend combined with a solid financial profile,” KPN Chief Executive Officer Eelco Blok said in a statement.
“KPN will now get the cash and reduce debt and start paying out dividends again,” Emmanuel Carlier, an analyst at ING Belgium SA in Brussels, said by phone. “We will also see more M&A activity in Europe, from which KPN might be able to benefit.”
Regulators said the concessions focused on strengthening virtual operators that piggyback on networks run by other companies because it was “very unlikely” that another physical-network operator would enter the German market. The spectrum pledge “keeps the door open” to a potential entrant in future, Almunia said.
Smaller operators would be forced “to compete very aggressively on the market as they have to commit upfront to purchase a significant amount of capacity, much larger than what they need to serve their current customer base,” the EU said. The companies have a “strong incentive” to acquire subscribers to fill this capacity, which represents about 10 percent market share of subscribers, Almunia said.
Rules governing how operators of physical networks must grant access to virtual operators could “have a subsidizing effect” on those smaller operators, Vodafone’s German unit said in a statement. The company doesn’t expect any new operators of physical networks to enter the market because of the required investments and the need to offer access to resellers, it said.
Telefonica said last month that Drillisch AG, a smaller carrier that doesn’t own a network, would buy 20 percent of Telefonica/E-Plus network capacity over five years. Drillisch will have the option to buy an extra 10 percent of the merged company’s capacity.
Telefonica also talked to Freenet AG, United Internet AG and Liberty Global Plc’s Unitymedia KabelBW, people familiar with the matter said last month. United Internet said it failed to strike an accord because conditions weren’t better than existing access agreements. Freenet has network-use contracts with Telefonica Deutschland through 2025, the company said.
A spokesman for United Internet declined to comment today on the EU decision, and a representative for Freenet wasn’t immediately available to comment.
EU approval for the deal comes after five out of 12 national competition regulators, including Germany’s Federal Cartel Office, refused to give their blessing to the deal at a meeting last month, the head of Austria’s competition authority said. The opinion of the merger advisory committee isn’t binding on the European Commission.
The EU has been criticized for approving combinations of mobile operators in Austria and Ireland. Austrian prices rose after two phone companies merged, Austrian regulators said. Concessions wrung by the EU from Hutchison Whampoa Ltd. in Ireland were “insufficient” and could bring “significant negative consequences for Irish consumer welfare,” the country’s telecommunications authority said.
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