Bloomberg News

Telefonica Germany Eyes Network Sharing Deal With E-Plus

October 26, 2012

Telefonica Germany Eyes E-Plus Network Sharing to Cut Costs

A customer enters an O2 mobile phone store, a unit of Telefonica SA, in Frankfurt. Photographer: Ralph Orlowski/Bloomberg

Telefonica SA (TEF)’s German unit, planning an initial public offering in Frankfurt next week, is considering sharing its mobile-phone network with Royal KPN NV (KPN)’s local E-Plus business to lower costs.

“When people were looking at a potential coming together of Telefonica Deutschland and E-Plus, there was some significant analysis of potential network synergies,” Rachel Empey, chief financial officer of Telefonica Deutschland Holding AG (O2D), told investors on a conference call yesterday. “Quite a lot of those synergies might be available through network sharing.”

Sharing wireless equipment or frequencies would help the two operators, which vie for the number three spot in Germany behind Vodafone Group Plc (VOD) and Deutsche Telekom AG (DTE), run more efficiently after they abandoned talks for a merger this year. A sharing agreement could also help Telefonica to reach a better valuation for its Munich-based unit, whose IPO is scheduled for Oct. 30 and from which it seeks to raise as much as 1.68 billion euros ($2.2 billion).

Telefonica Deutschland today narrowed the price range of the sale to 5.5 euros to 6 euros a share, compared with 5.25 to 6.5 euros previously, according to terms of the deal obtained by Bloomberg News. The company has received orders for all the stock it’s selling in the new range and the deal is expected to be completed Oct. 29 at 1 p.m. U.K. time, the terms show. Listing in Frankfurt is scheduled the following day.

‘Closer Look’

Telefonica Deutschland told investors yesterday it could share network infrastructure with E-Plus that runs second- generation and faster third-generation networks, adding that it’s in talks with two out of its three rivals and that a deal probably won’t be reached before early next year.

“We’re generally open to ideas for cooperation,” said E- Plus spokesman Guido Heitmann. “Whenever we see opportunities, we’ll have a closer look.”

Telefonica fell 1.2 percent to 10.07 euros at 9:04 a.m. in Madrid. The stock is down 25 percent this year, cutting the company’s market value to 45.9 billion euros.

A hypothetical merger of E-Plus and Telefonica Deutschland could generate synergies worth about 4 billion euros, according to a document prepared by one of the banks managing the IPO and obtained by Bloomberg News. KPN last year said that such a deal may generate 3 billion euros of synergies.

Asset Sales

Telefonica Chief Executive Officer Cesar Alierta is reversing a decade-long international expansion of the Madrid- based company by selling assets, including parts of its Latin American business, as he seeks to avert a further debt-rating cut for a company that has more than 58 billion euros of net debt.

The Spanish operator is considering more deals to share parts of local mobile-phone networks following an agreement to set up a 50-50 venture in the U.K. with Vodafone, a person with knowledge of the matter said in June. The U.K. venture follows a more extensive merger by Deutsche Telekom and France Telecom, which pooled their British wireless assets and brands into Everything Everywhere in 2010.

Telefonica and KPN, the biggest phone companies of Spain and the Netherlands respectively, had explored a combination of their German units as the former Dutch phone monopoly was fending off an unsolicited offer by Carlos Slim’s America Movil SAB. (AMXL) America Movil reached the 28 percent stake it sought in KPN in June.

‘Competitive Independence’

Telefonica Deutschland doesn’t see any major regulatory barriers to the deals it’s exploring, said a person familiar with the management’s plans, who asked not to be named because the discussions are private.

Germany’s Federal Network Agency, which could block a deal if “competitive independence” may be harmed, in principle allows the operation of common infrastructure or the sharing of frequencies. Such agreements may also have to be reviewed by Germany’s cartel office.

Telefonica Deutschland told investors yesterday it may seek to split spending on wireless equipment for the 800 megahertz spectrum with other operators. Those frequencies were obtained in 2010 by Telefonica, Deutsche Telekom and Vodafone to blanket rural areas with faster long-term evolution, or LTE, connections. E-Plus didn’t purchase that spectrum during the auction.

Telefonica is offering as many as 258.8 million shares of Telefonica Deutschland at 5.25 euros to 6.50 euros each. The IPO values the German business at as much as 7.3 billion euros. Most orders for the IPO were coming in the mid- to low-end of the price range, two people familiar with the matter told Bloomberg News on Oct. 19.

To contact the reporters on this story: Manuel Baigorri in Madrid at mbaigorri@bloomberg.net; Ruth David in London at rdavid9@bloomberg.net; Cornelius Rahn in Frankfurt at crahn2@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net


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