Telefonica Said to Halt 1&1 Talks Amid Bid to E-Plus Nod

Telefonica SA is relying on a deal with three smaller rivals in Germany to win European Union antitrust approval for its takeover of E-Plus, after talks broke down over an accord with one of the country’s biggest virtual mobile operators, three people familiar with the matter said.

Telefonica’s negotiations with United Internet AG, the operator of 1&1, foundered, said the people who declined to comment because the talks weren’t public. They said Telefonica is aiming to allay EU antitrust concerns by sharing as much as 7 percent of its network capacity with each of the trio -- Freenet AG, Drillisch AG and Liberty Global Plc’s Unitymedia KabelBW.

Madrid-based Telefonica’s $12 billion deal to merge its German unit with Royal KPN NV’s E-Plus has to overcome EU concerns that reducing the number of German mobile operators could harm competition and increase prices. The EU has targeted a June 18 date for a panel of national regulators to vote on the deal, paving the way for possible approval as soon as the following week, two other people said, also speaking on condition of anonymity.

Regulators have been criticized for approving the combination of two Austrian mobile operators without ensuring more competition from smaller rivals. The EU extracted concessions to bolster so-called virtual operators in Ireland when it approved Hutchison Whampoa Ltd.’s bid for Telefonica’s Irish business last week.

KPN shares climbed 5.1 percent to 2.76 euros at 4:14 p.m. in Amsterdam. Telefonica Deutschland gained 2.4 percent to 5.8 euros in Frankfurt. Telefonica gained 0.8 percent to 12.38 euros in Madrid.

Faster Speeds

United Internet was seeking guarantees from Telefonica for access to faster Internet that would maintain an existing agreement with E-Plus for transmission based on the high-speed long-term evolution technology, two of the people said. It was told on June 4 that concessions to the EU wouldn’t include such terms, one of the people said.

Under the concessions, smaller operators would have the option of securing sufficient volumes and pricing from Telefonica for so-called mobile bitstream access, the people said. That would give them scale to make it worthwhile to invest in infrastructure such as fiber-optics cables, they said.

Virtual Operators

Antoine Colombani, a spokesman for the European Commission, declined to comment, as did representatives for Telefonica and United Internet.

Virtual operators, who piggyback on a larger operator’s network to offer competing phone and Internet services, can offer “effective” competition and “it depends on the conditions they will operate under,” EU Competition Commissioner Joaquin Almunia said.

MVNOs already hold a stronger position in Germany than in neighboring countries. The three largest MVNOs, Freenet, United Internet and Drillisch, have a total of more than 17 million wireless customers.

Ralph Dommermuth, United Internet’s chief executive officer, said in an interview last month that he doesn’t rule out the company becoming a wireless infrastructure operator, though he added that it’s not feasible for a fourth operator to set up the 20,000 broadcasting sites required to cover all of Germany.

Almunia previously targeted a decision in the case “some weeks after” the Irish deal he cleared last week. The EU has a July 10 deadline to rule on the Telefonica/E-Plus transaction.