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As per media reports, Telefonica (TEF - Analyst Report) will acquire Dutch telecom giant, Royal KPN N.V.’s German unit, E-Plus, in a cash and stock deal. The asset is valued at around $6.5 million (€5 billion). The agreement for sale ended the speculations of a possible merger between the two companies, which will pose competitive threat to rival carriers, Vodafone Group Plc. (VOD - Analyst Report) and Deutsche Telekom AG.

In the first phase, Telefonica Deutschland will acquire a 100% stake in E-Plus for $4.8 billion (€3.7 billion) in cash. KPN will get a 24.9% of the combined entity. In the second phase, Telefonica’s German unit will pay $1.7 billion (€1.3 billion) to acquire a 7.3% stake from KPN.

Telefonica Deutschland plans to raise the initial $4.8 billion (€3.7 billion) in cash via selling shares to its existing shareholders. This will give the company a majority 65% holding in the combined entity. However, KPN will hold a 17.6% stake in the combined entity post the deal. America Movil S.A.B. de C.V. (AMX - Analyst Report), which has a 30% ownership in KPN, is supporting the proposed deal.

Reportedly, Deutsche Telecom and Vodafone are the biggest operators in Germany with 37 million and 32.4 million customers, respectively.  The united entity of Telefonica Deutschland and E-Plus will have a customer base of 43 million coupled with a 38% market share. According to the Spanish giant, the combined entity will generate $10.4 billion (€8 billion) in annual revenues and will create cost synergies of around $6.5 billion (€5 billion).

Nevertheless, the deal needs to get shareholders’ approval and most importantly the consent of the European antitrust officials, as the merged entity will reduce the choice for customers. Furthermore, the transaction could face significant opposition from Telefonica’s rivals as the combined entity will have a sizeable lead over them.  

Telefonica, which is one of the most indebted companies within the telecom industry, is planning to reduce its debt by approximately $6.4 billion (€5 billion) by the end of 2013. The telecom behemoth has stopped paying dividends and is planning a widespread restructuring to reduce its leverage.

Madrid-based Telefonica has also sold its minor stake in China Unicom Limited (CHU - Analyst Report) for $1.47 billion (€1.13 billion). Recently, the company agreed to sell its Irish operations to Hutchison Whampoa’s 3 Ireland for $1 billion (€780 million) and offloaded a 40% stake in its Central American operations for $500 million (€389 million).

Contrary to divesting non-core assets, the decision to acquire E-plus will be a welcome change for Telefonica. The deal will be a major achievement for the company in Europe, where the company has been struggling due to the macroeconomic uncertainty. However, getting the regulatory nod will be the biggest hurdle for Telefonica.

Telefonica currently carries a Zacks Rank #4 (Sell).

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