KPN’s $11bn deal with Telefonica tests European anti-trust stance

Deal would combine third and fourth-place players in Germany

Dutch telecoms group KPN will sell its German unit to Telefonica for €8.1 billion in cash and shares, in a long-awaited deal that will test the views of anti-trust regulators in Europe's largest mobile market.

If KPN's disposal of E-Plus passes muster, the new company would hold a share of about 30 per cent of Germany's mobile service revenue and would be better armed to take on Deutsche Telekom and Vodafone, with 35 per cent each.

Telefonica says it expects the deal to close in the first half of 2014, implying that it expects an in-depth anti-trust review of the deal by the European Commission.

KPN, which is 30 per cent owned by Mexican billionaire Carlos Slim's America Movil, will receive €5 billion cash and a 17.6 per cent stake in the newly merged company valued at some €3.1 billion.

Cost savings from the deal would be between €5 billion and €5.5 billion.

The price represents a multiple of 9.0 times E-Plus’s forecast core earnings, making it attractive to KPN, given the sector average is currently at 4.7 times, according to ThomsonReuters data.

It was not clear if Mr Slim backs the deal to sell KPN’s crown jewel to Telefonica, his arch rival in Latin America. America Movil has two seats on the KPN supervisory board and KPN did not say if the vote was unanimous.

For Telefonica, which has been selling assets for the past two years to cut its debts, the deal is a bold bet on Germany, a market where, despite recent intensified competition, profit margins remain high compared with Britain and Spain.

It also shows that the Spanish group’s deleveraging efforts have paid off, putting it in a position to pull off an important deal in a key market, said people involved in the talks.

Telefonica said it expected the deal would not affect its key net debt to core earnings (Ebitda) ratio. Rating agencies have not yet given their view on the deal. – (Reuters)