By Robert-Jan Bartunek and Harro Ten Wolde
BRUSSELS/FRANKFURT (Reuters) - European regulators have cleared Telefonica's bid to consolidate the German mobile market by buying smaller rival KPN's E-Plus for 8.6 billion euros ($11.7 billion), raising prospects of more deals to come across Europe's telecoms markets.
The European Union's powerful antitrust chief Joaquin Almunia said on Wednesday that Telefonica agreed to concessions - including selling some radio spectrum and renting out capacity on its network to smaller rivals - to ensure that the deal does not lead to higher prices for customers.
The remedies are similar to those agreed by Hutchison Whampoa in May when its 3 Ireland subsidiary won approval to buy the Spanish group Telefonica's O2 Ireland for about $1 billion.
Analysts said approval of the much bigger German deal could encourage operators in Italy, Spain and France to move ahead with similar mergers in those markets.
"We have to take a close look at the remedies but this seems to be a blueprint for other potential deals in Europe," said analyst Adrian Pehl at Equinet Bank.
Facing demands to invest in faster networks, European telecom groups say they need to get bigger to cope with five years of revenue declines. They argue that the region's fragmented market - which features more than 100 fixed and mobile groups compared with a half dozen in the United States - leads to price wars and poorer-quality service for consumers.
Combining Telefonica Deutschland and KPN's E-Plus will create Germany's largest mobile operator by customers with a market share of roughly 31 percent, giving Telefonica more clout in its battle with Vodafone and Deutsche Telekom's T-Mobile.
Telefonica Deutschland said E-Plus's chief executive Thorsten Dirks will take over as CEO of the new group.
The deal comes just as the German market, Europe's largest, has got even more competitive. Budget-oriented E-Plus has been winning customers at the expense of Vodafone despite having poorer network coverage and little high speed 4G mobile broadband.
KPN's shares were down 1.8 percent at 2.59 euros at 1452 GMT, while Telefonica Deutschland rose 2.3 percent to 6.24 euros and Telefonica fell 1 percent to 12.53 euros.
FOUR TO THREE
As a condition of approval, the European Commission insisted that Telefonica rents out up to 30 percent of the merged company's network capacity and divest some spectrum in the 2.1 GHz and 2.6 GHz frequency bands to allow the potential entry of new operators in the future.
Telefonica will also extend current wholesale agreements and offer 4G capacity to anyone that wants to offer such services.
The Commission said these measures would allow for up to three new mobile virtual network operators (MVNOs) to enter the market. MVNOs are already strong in Germany, selling cheaper plans often aimed at young people or immigrant populations.
Telefonica has already signed a deal with one virtual operator, Drillisch.
"The remedies to which Telefonica commits ensure that the acquisition of E-Plus will not harm competition in the German telecoms markets," Almunia said in a statement.
It remains to be seen how the German market, where mobile prices are amongst the highest in Europe, will be affected by the reduction from four to three carriers. A similar deal in Austria last year - a smaller market with initially low prices - did lead to price rises despite the buyer Hutchison agreeing to host virtual operators on its network.
Vodafone and Deutsche Telekom expressed concern that the concessions forcing Telefonica to give favourable conditions to virtual operators went too far.
Telecoms consultant John Strand questioned whether even beefed up virtual operators would be a real force against Telefonica, Vodafone, and Deutsche Telekom.
"Drillisch is not what you can call a player with success," said Strand. "If I was Telefonica I would be happy, Drillisch will probably not be able to sell the traffic Telefonica have to offer to them." Deutsche Telekom said that the merger would generate "a massive" imbalance at radio frequencies above 1 gigahertz. Vodafone also said it wanted the German regulator "to take back significant amounts of the merged entity's spectrum."
Overall though Europe's telecom sector will see the commission's softer approach on natonal market mobile mergers as a positive step won after several years of tough lobbying.
"Allowing companies to operate at an efficient scale is the first step towards increased network investments and increased quality services for European consumers," said Luigi Gambardella, who heads ETNO, the telecom operators' trade group.
(Additional reporting by Hannah Boland, Leila Abboud in Paris, and Kate Holton in London; Editing by Tom Pfeiffer and Greg Mahlich)