By Foo Yun Chee
BRUSSELS (Reuters) - Telefonica will win EU approval for its 8.6-billion-euro ($11.7 billion) bid for KPN's German unit E-Plus after agreeing to let smaller rivals in Germany piggyback on its mobile network, two people with knowledge of the matter said.
Faced with its fifth year of sales decline and the need for expensive upgrade networks for high-speed broadband, the telecoms industry has been looking to mergers to boost revenues.
But some operators and analysts say regulatory demands to assist smaller rivals in return for clearing mergers could dampen consolidation sentiment.
To secure EU approval for the E-Plus deal, Telefonica - Europe's biggest telecoms provider by revenue - will allow some smaller operators to lease at least a fifth of the combined company's network capacity, the sources said.
"The European Commission will clear the deal," said one of the people, who declined to be named because the European Union decision is not yet public.
The concessions could help up to three smaller operators, so-called mobile virtual network operators (MVNOs), following regulator concerns that the merger would reduce competition in Europe's biggest telecoms market, the sources said.
MVNOs are operators which do not own networks and instead rent access to established rivals' infrastructure. They tend to sell cheaper mobile plans, often without a long-term contract.
The sources said that Telefonica is now seeking to clinch deals with German rivals Freenet, United Internet and Drillisch. The companies could not be immediately reached for comment outside of office hours.
The Commission spokesman for competition policy, Antoine Colombani, declined to comment. A spokesman for Telefonica Deutschland, the subsidiary of Telefonica that is buying E-Plus, also declined to comment, saying only: "The Commission will decide on the merger clearance by July 10 at the latest."
The Commission's decision, expected by July 2, has already created dismay in the German cartel office. The sources said the German regulator had written both to European Competition Commissioner Joaquin Almunia and fellow agencies across Europe, warning against the merger.
"We sent a letter to the Commission in May regarding remedies on the table at that time. We had some concerns at that time," said Kay Weidner, spokesman at the German cartel office.
The Commission will brief national competition regulators on the proposed merger on Wednesday but is not expected to change its mind.
The concessions would be broadly similar to those offered by Hong Kong-based Hutchison Whampoa for its acquisition of Telefonica's O2 Ireland unit which received the regulatory green light last month.
Reacting to the Hutchison approval last month, Vodafone warned that MVNOs have few incentives to roll out their own network or make use of available spectrum.
(Editing by Robert-Jan Bartunek and Pravin Char)