Telefonica Deutschland in Talks to Acquire KPN's E

Telefonica SA (TEF) has revived negotiations to take over Royal (KPN) KPN NV's German mobile-phone business in an attempt to consolidate in one of Europe's most competitive wireless markets.

Telefonica Deutschland Holding AG (O2D), controlled by Spain's largest carrier and owner of the O2 brand in Germany, is in talks over a possible acquisition of E-Plus from KPN, the Munich-based carrier said today. In a separate statement, KPN, the former Dutch phone monopoly, said it's in negotiations to sell E-Plus, without identifying the potential buyer.

Telefonica and KPN have retained a pre-agreement to combine O2 with E-Plus even after negotiations fell apart last year, people familiar with the matter said, asking not to be identified because the deliberations are private. E-Plus was worth about 8.5 billion euros ($11.2 billion) a year ago, according to Rabobank International estimates at the time. The value has shrunk rapidly and may be as little as 4.5 billion euros including synergies with O2, according to Sanford C. Bernstein analysts' projections today.

O2 and E-Plus compete with market leaders Deutsche Telekom AG (DTE) and Vodafone Group Plc. (VOD) The elimination of a carrier by combining the third- and fourth-largest operators will be a test for antitrust regulators. Telefonica recently agreed to sell its Irish business to Hong Kong billionaire Li Ka-shing 's local unit called Three.

Cost Savings

"A deal makes sense for both KPN and Telefonica because Vodafone and Deutsche Telekom have such a strong position in the country," said Emmanuel Carlier, a Brussels-based analyst at ING Groep NV. "This could save a lot of operational costs and capital expenditures as the market is only getting more competitive."

O2 and E-Plus would have a combined mobile-phone customer base of more than 43 million, which would leapfrog Vodafone's 32.4 million and Deutsche Telekom's 37 million, data compiled by Bloomberg Industries showed. Counting wireless-service revenue, a combined E-Plus and O2 remained smaller than Vodafone and T-Mobile.

KPN, which counts Carlos Slim's America Movil SAB (AMXL) as one of its biggest shareholders, rose 13 percent to close at 1.80 euros in Amsterdam. Telefonica, Europe's most indebted phone company led by Chief Executive Officer Cesar Alierta, added 1.3 percent to 10.06 euros in Madrid. Telefonica Deutschland jumped 6.8 percent to 5.69 euros in Frankfurt.

Discussions have resumed in the past month and a deal would give Telefonica a controlling stake in the combined entity, said one of the people.

Telefonica would pay about $6 billion and in one structure being discussed, KPN would receive a small holding in Telefonica Deutschland, Financial Times reported earlier today, without citing anyone.

In a statement, Madrid-based Telefonica said it's working on possible deals in Germany, while no agreement has been reached.

To contact the reporters on this story: Manuel Baigorri in Madrid at mbaigorri@bloomberg.net; Aaron Kirchfeld in London at akirchfeld@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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