* European Commission likely to closely scrutinise deal
* Divestment of some mobile spectrum seen likely
* Would reduce number of German operators to 3 from 4
* Telefonica-KPN tie-up seen a watershed for European sector
By Foo Yun Chee and Leila Abboud
BRUSSELS/PARIS, July 24 Telefonica is
likely to persuade regulators to clear its 8.1 billion euro
($10.7 billion) bid for KPN's German mobile telecoms
business by giving up some spectrum and easing the entry of new
competitors, antitrust experts said.
The Spanish company's acquisition of KPN's E-Plus would
broadly put it on an equal footing with leaders Deutsche Telekom
and Vodafone in Europe's biggest mobile
market and reduce the number of operators to three from four.
That scenario typically rings alarm bells with regulators
concerned that less competition will drive up prices for
Miranda Cole, a lawyer at Covington & Burling, said the deal
would run into some opposition, but that concessions on spectrum
and network capacity should ease regulatory concerns.
"The deal is certainly going to get close scrutiny because
Germany is the biggest mobile market in Europe," she said. It
has around 110 million subscribers.
"It's likely to be about spectrum - how much would they be
required to give up - and making sure that mobile virtual
network operators (MVNOs) can continue to operate and making
entry through spectrum auction feasible."
MVNOs do not own networks and often sell cheap mobile plans
without long contracts, targeted at certain customers such as
young people or ethnic groups. Regulators could seek pledges
from Telefonica to rent access to MVNOs on favourable terms.
However, regulators may also be influenced by the fact that
Germany is already one of the most expensive mobile markets in
Europe and has lower-than-average smartphone penetration.
A monthly plan with 2 gigabytes of mobile data costs 39
euros, compared with 20 euros in France and 15 euros in Britain,
according to consultancy Rewheel.
Vodafone and Deutsche Telekom enjoy profit margins in German
mobile of 35 percent and 40 percent respectively, compared with
the low-20s for carriers in Britain and low-30s in France.
Telefonica's strategy will be to offer enough concessions to
secure approval without cutting too deeply into the benefits of
buying KPN's E-Plus. The company expects the deal to boost
profits by cutting between 5 to 5.5 billion euros of costs.
A person familiar with Telefonica's thinking said the
company would argue the deal, announced on Tuesday, would create
a strong third operator with the firepower to invest heavily in
faster mobile networks to compete with the market leaders.
It would have 43 million customers, more than Deutsche
Telekom's 37 million and Vodafone's 36 million. It would hold 31
percent of mobile revenue, said Citigroup, less than Deutsche's
34 percent and Vodafone's 35 percent.
"You have to assume that there will be spectrum divestments
in the 1.8 and 2.1 gigahertz bands," the person said, referring
to the mobile spectrum that the new group will hold most of.
"But beyond that there is no credible argument that big
concessions are needed," the person said.
E-Plus Chief Executive Thorsten Dirks said on Tuesday the
groups may have to give up frequencies to get the deal approved,
since they would have more spectrum than rivals.
If Telefonica does give up spectrum, it runs the risk that
the regulator could then sell it to a new company. Since Germany
is holding another mobile licence auction in 2014 or 2015, a
newcomer or cable group Liberty Global may buy enough
spectrum to launch a competing mobile service.
In Austria, regulators told Hong Kong-based Hutchison
to give back spectrum to get its purchase of Orange's
local business approved, and will seek to resell it
Telecom bosses have lobbied heavily this year for Brussels
to take a softer line on mergers, arguing that Europe has too
many operators labouring under heavy regulation that saps their
ability to invest in networks.
Neelie Kroes, EU commissioner for the digital agenda who
wants a single market for telecom services across the 28-nation
European Union, is receptive to their argument.
But the EU's top antitrust regulator Joaquin Almunia is more
skeptical that telecom groups will actually pump money into
better networks and services if they are allowed to get bigger.
Neal Milsom, the finance chief of EE, Britain's largest
telecom operator, said he hoped the regulator's stance on the
Telefonica deal would be a watershed.
"There is a really compelling case that you can get the
best of both worlds: a great offer and service for customers but
also a sustainable and profitable industry as well," he said.
A similar four-to-three deal with Hutchison
buying Telefonica's Ireland unit is also now up for EU review,
as is Vodafone's acquisition of Germany's Kabel Deutschland
Despite Brussels' eagerness to foster a single telecom
market in Europe, the idea is not likely to affect antitrust
reviews, said professor Christopher Kummer at the Institute of
Mergers, Acquisitions and Alliances.
"Even in a single telecoms market, you would like to avoid
having only very few players around," Kummer said.