UPDATE 5-Telefonica wins Slim over with sweetened German deal

Mon Aug 26, 2013 2:33pm EDT

* Telefonica raises bid for KPN's E-Plus to 8.55 bln euros
    * KPN's biggest shareholder America Movil says to back deal
    * America Movil maintains tender offer for rest of KPN
    * Next test will be antitrust review
    * KPN to get 20.5 pct stake in Telefonica Germany


    By Sara Webb and Clare Kane
    AMSTERDAM/MADRID, Aug 26 (Reuters) - Telefonica has
raised its bid for KPN's German arm by 6 percent to
8.55 billion euros ($11.5 billion), winning over top KPN
investor America Movil and setting the stage for consolidation
in Europe's largest mobile market.
    Mexican billionaire Carlos Slim's America Movil,
which owns almost 30 percent of KPN, said it backed Telefonica's
new offer for KPN's E-Plus unit. Shares of America Movil rose 1
percent in morning trade.
    Earlier this month, America Movil launched a bid for the
shares of KPN it did not already own, a challenge to the Spanish
telecoms group's original deal to buy the E-Plus unit.
    America Movil said on Monday it would press ahead with its
plan to buy the rest of the Dutch firm. But its bid faces
challenges from antitrust regulators, unions and a foundation
with power to block a takeover of KPN.
    Analysts also said some KPN shareholders, including hedge
funds who have bought shares recently, could pressure America
Movil to raise its offer.
    The agreement moves Telefonica closer to its goal of
stepping up its challenge in Germany to market leaders Deutsche
Telekom and Vodafone. 
    It also offers a better deal for America Movil, Telefonica's
arch-rival in Latin America which on paper has racked up huge
losses on its European investments since buying minority stakes
in KPN and Telekom Austria.
    The new offer hands KPN 5 billion euros in cash and also
increases its stake in the future combined German business to
20.5 percent from 17.6 percent under the terms of the previous
offer. 
    Investors are cautious about America Movil's European
expansion efforts. Its shares remain down more than 20 percent
since it announced it would offer 7.2 billion euros for KPN.
    Stefan Astheimer, vice president of strategy at investment
manager Howe & Rusling in Rochester, New York, said Monday's
news was mixed for the Mexican company.
    "On the one hand, they are losing the opportunity to gain
direct entry to the German market which was an important part of
their strategy," said Astheimer, whose firm has a small equity
and debt position in America Movil.
    "On the other hand, the deal will inject cash into KPN and
allow America Movil to focus on the Dutch and Belgian markets,
while giving them a larger stake in Telefonica Germany, which
should appreciate in value," he added.
    
    
    
    "I think it was prudent of America Movil to allow Telefonica
to acquire E-Plus rather than getting bogged down in a
potentially expensive or ugly conflict which would not reflect
well on their efforts to allay the concerns of the
KPN Foundation and others," Astheimer added.
    BPI analyst Pedro Oliveira said the deal showed Carlos Slim
and Telefonica boss Cesar Alierta could overcome their
differences. "Their business sense is becoming stronger than the
rivalry between Telefonica and America Movil," he said. 
    Telefonica still needs support from antitrust regulators for
a deal that will reduce the number of players from four to three
in Germany, a market with 112 million subscribers. 
    Many European telecoms firms are looking to consolidate to
cope with saturated markets, recession-hit consumers, tough
regulation and expensive network upgrades. 
    However, regulators are wary that reduced competition could
lead to higher prices for consumers and mobile profit margins in
Germany are already much higher than in Britain and France.
    "Politicians seem to be more favorable to protecting
telecoms companies ... but this is an operation that will have a
lot of scrutiny from the regulators," BPI's Oliveira said.
       
    DUTCH CHARM OFFENSIVE
    An independent foundation with power to block a takeover of
KPN has expressed concern about America Movil's bid to pay 2.4
euros for each share it does not own. 
    "There will be a tussle for control of KPN - the question is
will shareholders allow America Movil to take control of KPN via
the tender offer at such a low price?" said Bernstein Research
analyst Robin Bienenstock.
    America Movil executives will meet the Dutch Minister for
Economic Affairs, along with KPN union representatives on
Wednesday to discuss its plans for the Dutch telecoms group,
sources told Reuters. 
    "The Minister wants to be informed given the importance of
KPN for the Dutch economy," said one of the sources.
    KPN's largest union Abvakabo FNV also has concerns.
    "What are you investing in the cooperation with KPN and what
will that mean for jobs in the Netherlands? That's what I want
to get an answer to," said a union spokesman.
    America Movil bought into KPN in June 2012 at roughly 8
euros per share. It paid a much lower price in February to raise
its stake. 
    KPN's shares closed up 3 percent at 2.33 euros, while
Telefonica's rose slightly to 10.78 euros, with shares in its
German unit up 2.88 percent at 5.22 euros.
    
    TACTICS
    Telefonica has shed 10 billion euros of debt since June 2012
and plans more asset disposals, so it can afford the deal.
    "The increased amount is not big enough to put pressure on
the rating," said Carlos Winzer, analyst at Moody's, which rates
Telefonica at Baa2, two notches above junk territory.
    Under the revised terms, Telefonica will sign an option to
buy back 2.9 percent of its German subsidiary after a year at a
price of 510 million euros. The Spanish group sees the German
deal generating up to 5.5 billion euros in cost savings.
    Last month, experts told Reuters that Telefonica was likely
to try to win over antitrust regulators by offering to give up
some spectrum and by giving greater access to its networks to
new "virtual" operators. 
    To make its bid more attractive in the Netherlands, America
Movil said on Monday it would maintain KPN's headquarters in
that country and keep its stock market listing in Amsterdam, as
well as its commercial brands.
    Walter Samuels, a spokesman for the KPN Foundation, declined
to comment on Monday's announcements, other than saying: "We're
still following developments."