Telefónica gets positive signals over E-Plus deal, reports reduced debt

Telefónica's plan to buy German operator E-Plus from KPN for €8.1 billion ($10.7 billion) is being widely regarded as a watershed moment for the telecoms industry, as it will be a test case for whether antitrust regulators will soften their stance on market consolidation.

So far, the signs are positive that the deal to merge the KPN unit with Telefónica Deutschland will win approval, according to Reuters. Antitrust experts told the news agency that the Spanish operator is likely to give up spectrum and make it easier for MVNOs to get access to its network in exchange for approval.

Miranda Cole, a lawyer at Covington & Burling who specialises in competition and communications law and policy, told Reuters that the deal would run into some opposition, but that concessions on spectrum and network capacity should ease regulatory concerns.

"The deal is certainly going to get close scrutiny because Germany is the biggest mobile market in Europe," she said. "It's likely to be about spectrum--how much would they be required to give up--and making sure that mobile virtual network operators can continue to operate and making entry through spectrum auction feasible."

At the same time, regulators could also be influenced by the fact that Germany is already one of the most expensive markets for mobile data in Europe. A study released in May by research firm Rewheel indicated that one gigabyte of data in smartphone plans costs, on average, over €24 in Germany, compared to €7 in the UK and €1.6 in Finland, including comparable amount of traditional voice minutes and texts.

"As for data-only tariffs for laptops and tablets, on average, a gigabyte costs €6 in Germany, €4.5 in the UK and as low as €0.7 in Finland," the consultancy said.

A further obstacle for Telefónica could be KPN's shareholder Carlos Slim, who controls 30 per cent of the Dutch operator via América Móvil. Citing unnamed sources, the Financial Times reported that although Slim is not opposed to the deal 'in principle," he considers the €8.1 billion price tag to be too low, and is holding out for a better deal.

"It is a good deal today for the KPN shareholders but not from where Slim bought," one source told the FT.

For its part, Telefónica believes it has "compelling arguments" that the deals would help consumers and allow remaining operators to invest more in networks, Reuters reported. "There are too many players in Europe and the market needs to consolidate," COO José María Álvarez-Pallete López told the news agency.

Meanwhile, Telefónica has been able to reveal some good news on its debt, which is timely given the concerns over the impact of the E-Plus deal on its borrowings. During the presentation of its second-quarter and first-half results for 2013, the operator said it cut borrowings to under €50 billion ($66.4 billion) in the first half, putting it on track to meet full-year debt targets even after its planned purchase of E-Plus, Reuters reported.

Bloomberg noted that the operator also reported a smaller-than-expected decline in its sales and operating profit for the second quarter. Revenue fell by 6.8 per cent to €14.4 billion, but on an organic basis grew by 0.5 per cent, and operating income before depreciation and amortisation fell 9.3 per cent to €4.85 billion, or -0.7 per cent organically. Second-quarter net income fell 13 per cent to €1.15 billion.

For more:
- see this Reuters article
- see this Bloomberg article
- see this FT article (sub. req.)
- see this separate Reuters article

Related Articles:
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Telefónica Germany plots fast data, convergence strategy after tough Q1
Deutsche Telekom, Telefónica report lower sales in Q1
O2 Germany's IPO boosted by 3-year tax holiday
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