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Telefonica Deutschland – Telefonica’s (TEF - Analyst Report) German unit – has won America Movil S.A.B. de C.V.’s (AMX - Analyst Report) support to pursue the acquisition of Royal KPN N.V.’s German subsidiary, E-Plus. The agreement puts Telefonica one step closer to its entry into Europe’s biggest economy.

The America Movil nod came on the back of a 6% higher bid of $11.4 billion (€8.55 billion) by Telefonica. The new deal and will also give KPN a 20.5% stake in the combined entity than originally against 17.6% agreed earlier. Nevertheless, Telefonica will get a chance to buy back a 2.9% stake in the combined entity for $510 million after a year. Notably, in Jul 2013, KPN had agreed to sell its prized German asset to Telefonica in two phases. KPN was expected to get a combined value of around $10.8 billion (approximately €8.1 billion) via the cash and stake deal.

America Movil, which has a 30% ownership in KPN, initially supported the proposed deal. However, the Mexican giant itself offered $9.6 billion (€7.2 billion) for a 70% stake in the Dutch incumbent operator. It was expected that America Movil’s entry into the frame will pose significant threat to Telefonica as the former could block the deal to extract a higher price for E-Plus.

Reportedly, Deutsche Telecom AG and Vodafone Group Plc. (VOD - Analyst Report) 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. However, the deal needs to get the shareholders’ approval and the consent of the European antitrust officials, as the merged entity will reduce the choice for customers.

The agreement clears a major hurdle for Telefonica. The Spanish behemoth plans to complete the transaction by mid-2014 and expects to have cost and revenue synergies of around $6.7-$7.4 billion (€5-5.5 billion).  

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. On successful deal closure, Telefonica will largely benefit as Germany offers higher mobile profit margins than several other large European nations. However, the additional amount of the deal could further pressurize its leverage position.

Telefonica currently carries a Zacks Rank #3 (Hold). Another 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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