By Harro Ten Wolde and Alexander Hübner
FRANKFURT (Reuters) - German low-cost mobile phone operator Drillisch plans to move upmarket after its 8 billion euro ($8.9 billion) merger with United Internet's 1&1 brand, its chief executive said, posing a new challenge to premium brands.
Deutsche Telekom, Vodafone and Telefonica Deutschland have faced little threat until now from Drillisch, which appeals to customers on a tight budget and is known for its corny television ads featuring local celebrities.
"The perception that Drillisch stands for cheap deals will change," Chief Executive Vlasios Choulidis told Reuters. "We will be at the same level with the three big operators."
"We will continue to be able to offer the best value for money, but at higher prices we will also be able to offer more. Our products will be better and prices will rise accordingly," Choulidis said.
Drillisch has been on a roadshow to convince investors to back the 1&1 deal. It needs the support of 75 percent of shareholders at an extraordinary meeting on July 25 for it to go through.
The new Drillisch had been expected by analysts to become a greater threat to the more price-sensitive products offered by the three main operators, and leave the top end of the market relatively undisturbed.
Bernstein analyst Dhananjay Mirchandani said when the deal was announced that it should create heightened competition in more price-conscious sections while Telefonica Deutschland said it did not expect the deal to affect its strategy.
Drillisch is in the process of a staggered stock and cash deal with United Internet that will create a business valued at 8 billion euros with more than 12 million customers, offering mobile and fixed-line products under one roof.
That will make it the fourth biggest player in the German telecoms market, helped by United Internet's strong 1&1 brand and fiber network, the country's second largest, as well as having no need to invest in a mobile network.
Drillisch secured access to Telefonica Deutschland's mobile network three years ago as part of the steps Telefonica needed to take to get its 8.6 billion euro acquisition of KPN's E-Plus approved.
United Internet has already secured more than 30 percent of Drillisch via a Drillisch capital increase and share swap, and has made an offer of 50 euros per share to other shareholders who do not want to take part in the deal.
The arrangement involves Drillisch acquiring 1&1 through another capital increase and United Internet getting a majority of Drillisch in exchange. The cash offer expires on Friday.
Drillisch shares were trading at 54 euros at 1151 GMT, down 0.6 percent.
The Drillisch chief executive said the deal needed a lot of explaining but once shareholders got it, they liked it.
"We get decidedly positive feedback from our investors. Therefore, we are confident that we will get the approval from the shareholder meeting," he said.
UBS analyst Vikram Karnany said after meeting Drillisch management this month that the combination was attractive, mainly due to Drillisch's guaranteed access to Telefonica's network and the high cost savings likely to be achieved.
"We still think there is a high likelihood of the deal approval despite concerns from some shareholders on transaction structure," Karnany wrote in a note. "There remains low visibility on the terms of the deal."
($1 = 0.8954 euros)
(Editing by Maria Sheahan and David Clarke)