Telef¨®nica buys KPN German unit for 8.1 billion euros

Spanish telecoms giant Telef¨®nica said Tuesday it had agreed to acquire Dutch operator KPN¡¯s German unit E-Plus for 5 billion euros plus a stake of 17.6 percent of its own German unit Telef¨®nica Deutschland.

The deal will make Telef¨®nica the largest cellphone operator in Germany ¨C ahead of T-Mobile and Vodafone ¨C with 43 million customers and combined revenues of 8.6 billion euros. Telef¨®nica said the deal would also make it Europe¡¯s second-largest mobile operator in terms of clients and revenue.

Telef¨®nica said it expects the transaction to be closed during the first half of 2014.

The Spanish operator said the deal provides significant potential for synergies in distribution, customer service and network services. The total value of the synergies expected from the transaction is estimated at between 5 and 5.5 billion euros net of integration costs. Net savings will be positive from the second year of the acquisition.

Telef¨®nica Deutschland will initially fully acquire E-Plus for 3.7 billion euros in cash and a stake of 24.9 percent in the combined company. This cash segment of the deal will be financed through a rights issue worth 3.7 billion euros, of which Telef¨®nica will subscribe to 76.8 percent in proportion to its current stake. This will cost 2.84 billion euros.

KPN said the terms of the deal values E-Plus at 8.1 billion euros, nine times its prospective gross operating profit for this year.

Telef¨®nica will then acquire from KPN a stake of 7.3 percent in the combined entity for 1.3 billion euros. As a result, Telef¨®nica and KPN will hold 65 percent and 17.6 percent of Telef¨®nica Deutschland, respectively, with the remaining shares in free float. Telef¨®nica said that of the 5 billion euros paid in cash to KPN, the total amount required by Telef¨®nica to finance this operation is 4.14 billion euros.

KPN said Telef¨®nica would pay it 100 million euros in compensation if the deal is opposed by the European Union¡¯s competition commission

The acquisition follows a trend in which Telef¨®nica has been offloading assets to reduce its financial debt in order to maintain its credit rating. As a result, the company has reduced net debt by approximately 10 billion euros since June 2012.

Telef¨®nica said the E-Plus deal will mainly be financed through financial instruments, which will enable the company to maintain a stable leverage ratio. As a result, Telef¨®nica is maintaining its objective of financial debt of below 47 billion euros by the end of 2013.