April 11, 2013 3:03 pm

Telefónica eyes German tie-up with KPN

Telefónica will reopen talks with KPN to explore ways to bring together their German businesses in an effort to cut costs for the two heavily indebted European telecoms operators.

The Spanish group wants to explore a merger of the network used by O2 Germany with its rival’s E-Plus business, which are the third and fourth-largest operators in the country by subscribers, after Deutsche Telekom and Vodafone.

Those close to the situation said that the management of the two companies would meet to discuss the possibility of network sharing in greater detail, although any proposals would wait until after the completion of a €3bn rights issue by KPN. Shareholders in the Dutch group approved the capital raising on Wednesday. One of the people said that a meeting on the topic had already taken place.

Telefónica last summer held talks with KPN that went as far as considering a full merger of the two groups, a deal worth $20bn.

However, those talks ended after the two sides failed to agree terms, leaving KPN with few options to offer shareholders against the unsolicited €8-a-share offer for a large stake in the business from América Móvil.

KPN blamed “adverse conditions” in the financial markets for the breakdown of the talks. Telefónica instead decided to float a partial stake in the German business.

People familiar with the Spanish company’s thinking said it was keen on increasing its network-sharing agreements across various markets, following similar deals in Mexico, Brazil and the UK.

One of the people did not rule out a potential merger of the two business but said that a network sharing agreement was now the most likely option.

Telefónica and KPN declined to comment.

Network sharing has become a popular means of cutting costs by grouping ownership of fixed assets and dividing the costs of operations. To date, such moves have also not attracted interest from antitrust authorities as it maintains retail competition even if the groups use the same basic infrastructure. Regulators, however, are opposed to the sort of in-market consolidation that a full merger between O2 Germany and E-Plus would entail.

Telefónica is still looking for ways to reduce its costs as part of a wider debt reduction strategy that could lead to further asset sales, such as its Czech and Irish operations. This week, it emerged that the Spanish group was considering the flotation of its Columbian business.

KPN is expected to launch its rights issue after publishing its results on April 23, although the decision still rests on market conditions. The funds will be used to reduce its debt and improve operations, and come after the group raised €2bn through the sale of hybrid bonds.

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