Germany Opens Airwave Review on Telefonica-KPN Mobile Merger

Telefonica SA and Royal KPN NV, which have proposed to merge their German mobile-phone assets, could be forced to give up some wireless frequencies, according to the country’s telecommunications regulator.

The airwaves for carrying signals based on GSM and UMTS standards were granted under the condition that their users remain independent, Iris Henseler-Unger, vice president of the Federal Network Agency, wrote in a letter to Thorsten Dirks, chief executive officer of KPN’s E-Plus unit, and his counterpart at Telefonica Deutschland Holding AG, Rene Schuster, after a conference call on July 23.

“As a rule, the Federal Network Agency must guard the competitive independence of owners of frequency rights in an area of scarce resources,” Henseler-Unger wrote. “Ultimately, the Federal Network Agency can enforce this by withdrawing the frequency assignment.”

By agreeing to combine their German wireless assets in the 8.1 billion-euro ($10.8 billion) deal, Telefonica and KPN are laying down a challenge for European regulators, which in the past have blocked some telecommunications mergers or have required concessions that reduced projected cost savings.

The German transaction, which the companies plan to complete in mid-2014, will result in cost savings and revenue synergies of 5 billion euros to 5.5 billion euros, the carriers said last month.

Two Weeks

The Bonn-based telecommunications regulator will examine the proposal and has asked the companies to provide information within two weeks, according to the letter dated July 25. The agency will have to review whether the frequencies will still be “efficiently used” and whether the combination would hamper competition, Henseler-Unger wrote. The agency also plans to seek comments from competitors, she said.

KPN fell 0.9 percent to 1.98 euros at 12:33 p.m. Amsterdam time. Telefonica gained 0.1 percent to 10.87 euros in Madrid, while shares of the German unit added 0.3 percent in Frankfurt.

Telefonica Deutschland has “always said it seeks a swift clearance” of the deal from the relevant regulators, company spokesman Albert Fetsch said by telephone. The unit expects to successfully conclude talks with the Federal Network Agency in the next months, he said.

Antitrust Scrutiny

“We have immediately started talks with the relevant authorities as soon as the plan became public, but at this stage it is way too early to comment on who might do what under which circumstances,” Guido Heitmann, a spokesman for E-Plus, said by telephone. “The talks are only at the beginning.”

E-Plus and Telefonica Deutschland together would have a customer base of more than 43 million as of March 31, surpassing Vodafone Group Plc’s 32.4 million and Deutsche Telekom AG’s 37 million, according to data compiled by Bloomberg Industries. Counting wireless-service revenue, Telefonica Deutschland and E-Plus together remained smaller than Vodafone and T-Mobile.

In 2010, Telefonica, Deutsche Telekom and Vodafone bought 800 megahertz spectrum in an auction to cover rural areas with faster long-term evolution, or LTE, connections. E-Plus didn’t purchase that spectrum during the auction.

Telefonica and KPN also have to file for separate antitrust approval for the merger. Both the European Commission and the German Federal Cartel Office would be interested in reviewing a potential merger of Telefonica Deutschland and E-Plus, a person familiar with the matter said last year. Germany’s antitrust regulator won’t in principle rule out a reduction in market participants, another person said at the time, when KPN and Telefonica were holding talks about a merger of the assets.

In December, Hutchison Whampoa Ltd.’s 1.3 billion-euro purchase of wireless carrier Orange Austria won European Union approval after the Hong Kong company agreed to divest spectrum and offer network access to new rivals.

Germany’s Frankfurter Allgemeine Zeitung reported the letter earlier today.

-- Editors: Kenneth Wong, Ville Heiskanen

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