- The deal has the backing of America Movil, the Mexican group controlled by Carlos Slim
- Telefónica will finance part of the transaction with a €3.7bn rights issue by its German business
- The deal, which is structured in two stages, will see KPN's E-Plus unit merged into Telefónica's
KPN, the Dutch telecoms group, has agreed the sale of its German business to a subsidiary of Telefónica of Spain for €5bn in cash plus a stake in the enlarged group worth €3.1bn.
The deal will create the biggest mobile operator in Germany by subscribers, surpassing Vodafone and T-Mobile, with a 38 per cent market share. It would also cut the number of mobile networks in Germany from four to three.
The deal, which is structured in two stages, will see KPN's E-Plus unit merged into Telefónica's German business, Telefónica Deutschland, with the Spanish group taking a 65 per cent stake in the enlarged entity. KPN will have a 17.6 per cent stake, while the remainder will be a free float.
Telefónica will finance part of the transaction with a €3.7bn rights issue by its German business. It will subscribe to €2.84bn of the new shares to maintain its stake at 76.8 per cent. The Spanish group also said the deal should create savings of between €5bn and €5.5bn.
KPN said it would use most of the proceeds to pay down debt and would restart dividend payments in 2014. The deal requires the approval of KPN's shareholders and regulators. Germany's Federal Network Agency, said on Tuesday it would examine the impact of the planned sale to see if it would distort competition.
The deal has the backing of America Movil, the Mexican group controlled by Carlos Slim, the Mexican billionaire, which is the largest shareholder in E-Plus and has a 30 per cent stake in KPN.
The sale of E-Plus follows last month's acquisition of Kabel Deutschland, the German cable company, for €7.7bn by Vodafone and illustrates the growing attractiveness of the German telecoms market in contrast to southern Europe which is still shrinking.
Eelco Blok, chief executive of KPN, said: "The opportunity to unlock significant value in Germany by selling E-Plus is clear and compelling."
Javier Mielgo, a telecoms analyst at Mirabaud Securities in Madrid, said the deal "makes all the strategic sense in the world for Telefónica".
"Germany is one of the markets with most growth potential for the group and the merger with E-Plus could bring significant synergies," Mr Mielgo said.
But Ulrich Rathe, an analyst at Jefferies, said obtaining regulatory approval could be a "major hurdle".
"In an environment where in-market consolidation has been put under intense regulatory scrutiny in Europe in the past, we believe such a deal would face significant hurdles in principle, even before discussing potential concessions," Mr Rathe wrote in a note.
"The announcements do not mention regulatory indications, and we understand the companies involved have not sought pre-deal indications from authorities at this stage."
The announcement came as KPN said its second-quarter net profit fell to €108m, down 68 per cent from the same period a year ago due to tough market conditions for its mobile phone operations and an ongoing decline in fixed-line services.
KPN shares surged 13 per cent in early trade on Tuesday to €2.04, before falling back to €1.93. They rose 13 per cent on Monday to €1.80 after talks of the German sale were first reported in the Financial Times.
Telefónica's shares were up 2.9 per cent on Tuesday after closing 2 per cent higher at €10.14 on Monday.