Almost exactly a month after Telefonica agreed the sale of O2 Ireland to Hutchison Whampoa, as part of its ongoing debt reduction efforts, the Spanish firm has agreed a much larger deal to acquire E-Plus, Dutch rival KPN's German mobile network. Telefonica, whose German arm Telefonica Deutschland already runs the third largest mobile network in Germany, will pay KPN around €5bn for E-Plus, and KPN will also retain a minority stake in the merged business.
Such a large purchase may look strange against the background of Telefonica's debt reduction efforts. However, Germany's mobile market stands out as one of the strongest and most stable in Europe, despite increasing competitive pressures, and Telefonica's move to strengthen its position in this comparatively high margin market, while undeniably bold, does make a good deal of sense. In terms of total mobile revenues, IDC expects the German market to register basically flat growth over the next five years, whereas in the majority of Western European countries IDC expects to see a notable decline in mobile service revenues over the same period. By combining Telefonica Deutschland's O2 network with E-Plus, Telefonica stands to gain a much greater share of this mobile service revenue, and also to improve scale and realize cost savings thereby increasing margins.
O2 and E-Plus are the third and fourth largest of Germany's four mobile networks, respectively. If the two networks successfully combine into one, that one will be the market leader in connections, but not too far ahead of current leader T-Mobile, with Vodafone not far behind. This leaves the three companies reasonably well matched to compete in the mobile marketplace, especially given T-Mobile's position as the mobile arm of incumbent Deutsche Telekom, and Vodafone growing presence in the fixed broadband market in Germany. Despite this, IDC expects the process of achieving regulatory approval for their combination to be challenging and drawn out. There is precedent in Europe for combining the two smallest players in a four operator market - a similar consolidation was recently achieved in Austria, and as mentioned above the process is moving forward in Ireland. However, the deal in Austria in which the smallest operator acquired its next biggest rival, had to wait a year for full national and European regulatory approval. With the German mobile market around seven times larger than Austria's, this precedent may not help speed the deal at all, and it could easily take even longer to gain regulatory approval.
Such a large purchase may look strange against the background of Telefonica's debt reduction efforts. However, Germany's mobile market stands out as one of the strongest and most stable in Europe, despite increasing competitive pressures, and Telefonica's move to strengthen its position in this comparatively high margin market, while undeniably bold, does make a good deal of sense. In terms of total mobile revenues, IDC expects the German market to register basically flat growth over the next five years, whereas in the majority of Western European countries IDC expects to see a notable decline in mobile service revenues over the same period. By combining Telefonica Deutschland's O2 network with E-Plus, Telefonica stands to gain a much greater share of this mobile service revenue, and also to improve scale and realize cost savings thereby increasing margins.
O2 and E-Plus are the third and fourth largest of Germany's four mobile networks, respectively. If the two networks successfully combine into one, that one will be the market leader in connections, but not too far ahead of current leader T-Mobile, with Vodafone not far behind. This leaves the three companies reasonably well matched to compete in the mobile marketplace, especially given T-Mobile's position as the mobile arm of incumbent Deutsche Telekom, and Vodafone growing presence in the fixed broadband market in Germany. Despite this, IDC expects the process of achieving regulatory approval for their combination to be challenging and drawn out. There is precedent in Europe for combining the two smallest players in a four operator market - a similar consolidation was recently achieved in Austria, and as mentioned above the process is moving forward in Ireland. However, the deal in Austria in which the smallest operator acquired its next biggest rival, had to wait a year for full national and European regulatory approval. With the German mobile market around seven times larger than Austria's, this precedent may not help speed the deal at all, and it could easily take even longer to gain regulatory approval.
