* Telefonica, KPN boards meet Monday on deal - sources
* Telefonica would pay $6 bln and give KPN stake in new firm
* KPN confirms in talks to sell business
* Telefonica confirms negotiating a deal
* Deal likely to face EU antitrust review
By Andrés González and Leila Abboud
MADRID/LONDON, July 22 Telefonica and
KPN are in talks to combine their German mobile
businesses in a deal worth over $6 billion that would help them
compete with bigger competitors Deutsche Telekom and
Under the terms being discussed, Spain's Telefonica would
pay the Dutch telecoms operator $6 billion in cash and KPN would
get a stake of between 15 and 30 percent in the newly-created
company, two people familiar with the matter said.
Telefonica would issue hybrid debt to help finance the deal,
another person said. Two sources told Reuters the boards of KPN
and Telefonica would meet on Monday and were expected to approve
KPN, which is controlled by Mexican tycoon Carlos Slim,
confirmed in a statement that it was in talks to sell its German
business, E-Plus, and Telefonica said it was involved in
negotiations in Germany, but neither company mentioned the
"At this stage the outcome is not yet clear. Further
announcements will be made, if and when appropriate," KPN said.
Telefonica said no deal had been closed.
Shares in KPN jumped 13 percent.
E-Plus and Telefonica's O2 Deutschland vie for
third place in Europe's biggest mobile market and both are
facing tough competition from their larger rivals. E-Plus cut
its prices in January in an attempt to gain market share.
For KPN and its backer Slim, the world's richest man, a
merger would help keep it competitive in Germany. It has smaller
mobile spectrum holdings and weaker coverage than its
For Telefonica, the deal would improve profitability in its
third-biggest market in Europe after Spain and Britain.
Combining the two businesses could bring synergies - cost
savings and revenue gains - of 4 billion euros or more,
according to analysts.
Both companies also need more firepower to invest in fourth
generation wireless networks - KPN is in an especially weak
position because it has none of the best spectrum in 4G.
Telefonica already listed part of O2 Deutschland last year
in a drive to cut debt and raise cash as the group suffered from
its exposure to Spain's recession-hit economy.
The talks with KPN were first reported by the Financial
Times. Slim's company America Movil and E-Plus declined to
FOUR WEEKS OF TALKS
America Movil competes head-to-head with Telefonica, which
is present across Latin America.
KPN and Telefonica have discussed a tie-up and sharing of
networks several times in the past decade, including just before
Slim bought 28 percent of KPN last year. At that time, KPN
sought a tie-up with Telefonica to avoid falling under Slim's
Those talks fell apart at the last minute because of
valuation and Telefonica's high debt, which made borrowing
during the euro zone crisis difficult.
This time the talks went much more quickly, two sources
said. They began in earnest over the past four weeks, since KPN
completed a 3-billion-euro rights issue.
Telefonica's shares closed up 1.32 percent on the day at 10
euros, while KPN's share price shot up 13 percent to 1.80 euros.
The price of insuring KPN's debt fell by around 4 percent, while
Telefonica's credit default swaps (CDS) also tightened slightly.
KPN launched a 3 billion euro rights issue in April to help
reduce debt and invest more in its networks in the Netherlands
and in Germany.
The firm, with outstanding debt of 14.4 billion euros, also
cancelled its dividend for this year and next.
KPN will unveil its second-quarter results on Tuesday
morning, with a Reuters consensus of 10 analysts expecting a 17
percent fall in core profit, mainly due to a pronounced decline
in its international mobile unit, of which Germany is the
Although Telefonica is burdened with around 50 billion euros
of debt, it would do well to expand in a healthy market like
Germany to offset weakness in countries such as Spain.
Competition is heating up as consumers switch to smartphones
from basic handsets and operators shake up tariffs to focus on
data and raise spending on marketing.
A KPN-Telefonica tie-up is likely to attract scrutiny from
both German authorities and Brussels regulators and the combined
company may be forced to offer remedies such as access for
virtual operators (MVNOs) or giving back spectrum.
"What I ask myself is what the regulator would do with
this," said analyst Jos Versteeg at Theodoor Gilissen private
bank. "In other countries, we've seen more operators entering.
This would leave Germany without a real challenger."