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TMT SUMMIT: KPN Eyes Network Sharing Deal with Telefonica in Germany

Date : 11/15/2012 @ 12:05AM
Source : Dow Jones News

TMT SUMMIT: KPN Eyes Network Sharing Deal with Telefonica in Germany

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By Archibald Preuschat

BARCELONA--Dutch telecommunications company Royal KPN NV (KPN.AE) is eyeing a deal with Telefonica SA (TEF) to cut costs by sharing their mobile networks in Germany, KPN Chief Executive Eelco Blok said Wednesday.

Speaking at a Morgan Stanley conference in Barcelona, Blok said a "good, full network sharing deal would be beneficial" for both companies.

KPN owns German mobile operator E-Plus and Spain's Telefonica owns O2 Germany. The two units are the third and fourth biggest mobile operators by customer numbers in Europe's largest economy, which has remained relatively unscarred by sovereign debt crisis unwinding on the continent's southern rim.

Telefonica failed in a behind-the-scenes attempt to take over E-Plus last summer--a deal thought to be worth close to 11 billion euros ($14 billion)--after it failed at the 11th hour to secure funding following a downgrade by credit rating companies.

Such a deal would have created synergies of about EUR4 billion, Mr. Blok said at the time.

The KPN chief said Wednesday that a good part of those savings could still be achieved through network sharing, though he didn't specify how the deal would work. "The value is there and Telefonica knows that the value is there," Mr. Blok said.

Many investors have discounted a chance of collaboration between E-Plus and O2 since Latin American mobile giant America Movil S.A.B. de C.V. (AMX) became a big shareholder in KPN last June. It now holds roughly 28%.

America Movil is controlled by Mexican billionaire Carlos Slim, who has a long-standing rivalry with Telefonica chief Cesar Alierta. America Movil and Telefonica are Latin America's No. 1 and 2 telecom companies and compete fiercely in such markets as Mexico and Brazil.

But Mr. Blok said he thought it was unlikely its key shareholder would stand in the way. "I don't believe that America Movil would block a good transaction, for instance in Germany," he said.

Minutes before Mr. Blok made his remarks, Angel Vila, Telefonica's manager in charge of financial and corporate development, said the debt-burdened Spanish telecom firm is looking at network sharing, but he declined to specify markets. "We are exploring in many countries, it's the way forward," Mr. Vila said.

Many of Europe's telecom giants are struggling to maintain profits as the euro-zone crisis--now in its fifth year--crimps spending by consumers and businesses at a time when they need to roll out new network technology to keep competitive.

With mergers and acquisitions activity largely blocked by strict antitrust laws, many see network sharing as a natural alternative.

"Everyone's talking to everyone. There's an effervescence around the telecommunications market," Vivendi CFO Philippe Capron said Tuesday on a conference call with journalists when asked about potential deals surrounding its French mobile arm SFR. Capron declined to say if any deal would be reached.

However, there are difficulties inherent in network-sharing deals. Deals between large and small operators wouldn't make sense, as the smaller firm would benefit disproportionately, Morgan Stanley analyst Nick Delfas said. On the other some say big deals between the continent's giants could fall foul of antitrust rules.

In Germany, E-Plus and O2 are challengers in a mobile sector dominated by Deutsche Telekom AG (DTE.XE) and Vodafone PLC (VOD). Nevertheless a workable deal could be hard to achieve. Telefonica Germany, O2's owner, plans to invest almost EUR700 million in coming years to roll out faster and more powerful LTE networks in the country. And according to independent tests the quality of its network in Germany is close to that of Deutsche Telekom's and Vodafone. E-Plus's network, however isn't as competitive and the KPN unit hasn't set a date for an LTE roll-out yet.

--Sam Schechner contributed to this story

Write to Archibald Preuschat at archibald.preuschat@dowjones.com

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