Dutch telco KPN has agreed to sell its German unit E-Plus to Telefonica Deutschland (O2) in a deal worth a total €8.1bn.
KPN’s supervisory and management boards announced today that the agreement will see the company sell E-Plus to O2 for €5bn in…
Dutch telco KPN has agreed to sell its German unit E-Plus to Telefonica Deutschland (O2) in a deal worth a total €8.1bn.
KPN’s supervisory and management boards announced today that the agreement will see the company sell E-Plus to O2 for €5bn in cash and a 17.6% stake in the new combined entity.
Upon completion of the transaction, KPN will transfer 100% of shares in E-Plus to O2 for a consideration made up of €3.7bn in cash and newly-issued shares in O2 equal to a 24.9% stake.
At the same time, Spain’s Telefonica will acquire a 7.3% stake in O2 from KPN for a cash consideration of €1.3bn. KPN’s remaining 17.6% stake in O2 will be subject to a lock-up period of 180 days.
KPN noted that the total transaction values E-Plus at €8.1bn – 9.0x its FY 2013 EBITDA.
O2 Germany rights issue
O2 Germany will finance the cash portion of the consideration by a fully-underwritten rights issue. Telefonica has agreed to subscribe to the rights issue proportionate to its current shareholding in O2. The German unit will not raise any new debt to finance the acquisition.
As a result of the transaction Telefonica will reduce its stake in the German unit from 77% to 65%.
The transaction requires KPN shareholders approval at an EGM set to be held within the coming weeks.
O2 Germany’s shareholder approval is no an issue given Telefonica’s 77% stake in the company.
Closing in mid-2014
The deal is also subject to regulatory approvals. The parties expect it to close in mid-2014.
KPN and O2 said the new, combined E-Plus-O2 entity will have annual revenues of more than €8bn. The companies expect to create estimated synergies of €5-€5.5bn. O2 said synergies will be particularly significant with respect to distribution, customer service and network, with incremental value from factors such as additional revenue.
O2 chairman and Telefonica Europe CEO Eva Castillo said the deal demonstrates Telefonica’s “strong commitment to the German market”, adding that it gives the group “a leading position within the strongest economy in Europe”.
“It also recognises the need for in-market scale and the transformation required to assure a sustainable, vibrant and strong telecoms industry within Europe.”
KPN CEO Eelco Blok said the opportunity “to unlock significant value in Germany by selling E-Plus is clear and compelling”.
“The significant premium embedded in the sale price recognises the substantial operational synergies. The combination of E-Plus and Telefonica Deutschland will establish a mobile operator with attractive synergy and growth potential in Europe’s largest economy.”
Regulatory review
In a note to investors, Bernstein Research analysts said they believe the deal will secure regulatory approvals, although “significant remedies”, which include both spectrum and customers, could be required. They noted that the new, combined entity would be the sector’s largest player in terms of subscribers with a 38% share, but smallest in terms of market share of service revenue (32%).
“Telefonica and KPN will be able to argue that a strong third player is more likely to create price competition in the German market and that, in light of the likely integration of Vodafone and KDG, the German communications would be more fairly considered on an integrated basis, not a separate wireless/wireline one.”
In the analysts’ view, a successful deal would be “an incremental positive” for the entire telecoms sector as “it suggests that, faced with bottoming fundamentals, [it] is finally willing to engage in constructive reparation of markets”.
Meanwhile, Nomura analysts felt KPN’s total valuation of the deal is slightly exaggerated, saying that, based on O2’s new share count, the Dutch telco’s stake in the company is worth €1.77bn, implying a total deal consideration of €6.77bn. All the same, the analysts said this still equates to a “healthy” 7.37x 2013 EBITDA multiple.
In their view, the European Commission is likely to review the deal.
“A significant portion of the €5-€5.5bn synergies mentioned by Telefonica/KPN (vs our €4bn estimate) could be regulated away, but still a change in stance on four to three consolidation in European mobile is set to benefit stocks with exposure to core four-participant mobile markets, in particularVodafone, DT and Telefonica.”
Post-transaction, KPN intends to focus on its core geographies of the Netherlands and Belgium. The telco said the majority of the proceeds from the E-Plus deal will be used to increase the company’s “financial flexibility” and recommence dividend payments.
