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Spanish telecom giant, Telefonica’s (TEF - Analyst Report) German unit, Telefonica Deutschland, has confirmed that it will stick to its previous plan to acquire Royal KPN N.V.’s German subsidiary, E-Plus. The confirmation came after America Movil S.A.B. de C.V. (AMX - Analyst Report) offered $9.6 billion (€7.2 billion) for a 70% stake in Dutch telecom giant, KPN.

In Jul 2013, KPN had agreed to sale its prized German asset to Telefonica in two phases. This will create the largest telecom company in Germany in terms of subscriber base. 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 24.9% of the combined entity. In the second phase, the company will pay $1.7 billion (€1.3 billion) to acquire a 7.3% stake in the combined unit 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.

KPN is expected to get a combined value of around $10.8 billion ($8.1 billion) via the cash and stake deal. The deal will pose competitive threat to rival carriers, Vodafone Group Plc. (VOD - Analyst Report) and Deutsche Telekom AG.  

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 Telefonica, 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). However, the deal needs to get the shareholders’ approval and most importantly the consent of the European antitrust officials, as the merged entity will reduce the choice for customers.

America Movil, which has a 30% ownership in KPN, initially supported the proposed deal. Nevertheless, by bidding for the remaining part of KPN, it is expected that America Movil will now try to obstruct the deal. America Movil’s entry into the frame poses significant threat to Telefonica as the former could extract a higher price for E-Plus as they are major rivals in the Latin American market.        

The decision to acquire E-plus is a welcome change for Telefonica as it has been divesting its non-core assets to reduce its mounting debt. However, if America Movil raises the bid price higher, Telefonica could exit the KPN deal because of its highly leveraged position.

Telefonica currently carries a Zacks Rank #3 (Hold). Other stock worth considering within the same sector is Turkcell Iletisim Hizmetleri AS (TKC - Snapshot Report) which currently carries a Zacks Rank #2 (Buy).

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