German Agency Says Telefonica With E-Plus Must Cede Airwaves

Telefonica SA must give up some wireless frequencies in Germany should it gain approval for its planned takeover of Dutch carrier Royal KPN NV’s E-Plus unit, according to the Federal Network Agency.

The carrier created from the proposed merger of Telefonica Deutschland Holding AG with E-Plus would hold more than half of all available 900-megahertz and 1,800-megahertz frequencies, ranges that are crucial for providing high-speed Internet connections, the Bonn-based telecommunications watchdog said in a 12-page position paper on its website. The agency plans to start an allocation process this year for new and expiring frequencies following an approval of the transaction, it said.

Telefonica and KPN last year agreed on the 8.6 billion-euro ($11.9 billion) merger, which would create Germany’s largest wireless operator by customers to surpass market leaders Deutsche Telekom AG and Vodafone Group Plc. Approval by the European Commission, which is working with Germany’s network agency on reviewing the deal, may trigger more consolidation in Europe’s telecommunications industry.

Telefonica, which sells services under the O2 brand, and E-Plus have to submit proposals for concessions to the European Commission by tomorrow to allay regulators’ concerns that the combination may harm competition, a person familiar with the matter said, asking not to be named because the time limit isn’t public. The EU has a May 14 deadline to rule on the transaction.

Third Parties

One criterion that the European Commission may consider in its decision is access for third-party phone service providers to the joint company’s network.

United Internet AG, which offers connections via its 1&1 brand, told the commission that Telefonica Deutschland should be required to provide access to such mobile virtual network operators at cost price, Chief Executive Officer Ralph Dommermuth said in an interview last week.

Freenet AG, owner of the MVNO Mobilcom-Debitel, has also voiced concern over gaining access to the merged provider’s network.

The EU usually asks rivals and customers to comment on the proposed concessions. It can demand further changes before taking a final decision on the deal.

Germany’s network agency reacted to competitors’ concerns that the spectrum holdings would allow the joint company to roll out networks faster and use cheap tariffs to further expand its customer base.

Competition Call

“As a first step, it will be necessary that the spectrum in the 900 MHz and 1,800 MHz ranges be vacated by Telefonica/E-Plus in time for the allocation to a competitor, to enable the competitor to utilize the frequencies quickly,” the Federal Network Agency said in its paper. It’s seeking comments from the industry through April 11.

As a second step, the agency will review the effects of the merger and the allocation of new spectrum, it said.

Frequency allocation is a key component of the regulatory review, Telefonica Deutschland spokesman Albert Fetsch said by phone. The carrier still expects approval by the commission as well as the network agency this quarter, he said.

KPN spokesman Stefan Simons declined to comment on the paper. Vodafone spokesman Volker Petendorf said the company will review whether its concerns are sufficiently reflected in the watchdog’s statement. Representatives for Deutsche Telekom didn’t immediately return calls seeking comment.

Share Performance

Telefonica rose 0.3 percent to 11.52 euros in Madrid today, while its German subsidiary climbed 1.5 percent to 5.84 euros in Frankfurt. KPN added 1 percent to 2.59 euros in Amsterdam, Deutsche Telekom fell 0.7 percent to 11.68 euros in Frankfurt and Vodafone was unchanged at 220.30 pence in London trading.

There’s no need to act in the short run on the 800-MHz, 2-gigahertz, 2.6-GHz and 3.5-GHz frequency blocs held by the companies, the German watchdog said in its statement.

In a research note today, Sanford C. Bernstein analysts led by Robin Bienenstock said they expect the deal go through and that “anxieties are misplaced.” In the less likely event that the transaction is blocked by regulators, one of two scenarios seems possible, they said: “a full merger of their infrastructure, or if remedies are too onerous, Telefonica could in theory re-negotiate its price with KPN.”

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