November 16, 2011 / 6:02 PM / 9 years ago

KPN CEO says merger with O2 in Germany makes sense

BARCELONA, Spain, Nov 16 (Reuters) - Dutch telecoms firm KPN, struggling in its domestic market, said it would make sense to merge in Germany with Telefonica’s O2, in what could signal the start of a long-awaited wave of consolidation in mature markets.

Eelco Blok said that a deal in Germany between O2 and its key E-Plus business could be attractive in a market where both operators lag behind Vodafone and Deutsche Telekom’s T-Mobile.

Blok said he did not see anything happening imminently but his comments are likely to be seized on by investors and analysts in an industry long seen as ripe for consolidation in the mature and highly competitive markets of western Europe.

“There is clearly value to be created in in-country consolidation in Germany. Merging O2 and E-Plus would give the opportunity if you do it in the right way to create around 3 billion (euros) of value,” he said, without explaining how he had arrived at that number or what it meant.

“So far it’s not happening,” Blok told the Morgan Stanley technology, media and telecom conference in Barcelona. “We are not sellers of E-Plus, we are convinced that with our strategy we can create value and Telefonica is also not willing to sell.

“(But) if the price is right and Telefonica are willing to sell, then it could be an interesting scenario. We have the management in Germany that has proven that it can run an asset far better than the others.”

Telefonica has long been linked with some kind of deal for KPN, although the new head of Telefonica’s European division told reporters in London earlier this month that he did not see the group significantly changing its scale.

Speaking at the same conference, Telefonica’s Chief Finance Officer Angel Vila said he did not consider its German unit to be a failing business. He said it had good traction with customers and that they had no intention to sell.

“We’re very happy with it,” he added.

COMPETING INTENTIONS

Other large operators such as Vodafone have said they would like to see consolidation within the toughest European markets after it withdrew from a host of countries such as Poland, France and China in a drive to simplify its portfolio.

France Telecom is looking to exit certain markets including Switzerland and Austria while KPN itself is considering options for its units in Spain and France.

Any proposed deal between the third and fourth players in Germany would likely be watched closely by other operators around Europe to measure the response of the regulator and whether that approach could be applied elsewhere.

The British market has recently gone from five operators to four with the merger of Deutsche Telekom and France Telecom in that market and a plan this year by the regulator for a spectrum auction indicates that it wants four operators to remain.

KPN’s German unit, which trades as E-Plus, is highly profitable and key to the wider group, especially as it struggles in its domestic market where it is the largest operator.

KPN has struggled to reverse a decline in revenues, profit and market share in its domestic fixed-line and mobile businesses in recent quarters as competition has intensified.

In that market, Blok said it would make sense for KPN to snap up smaller player Tele2, but said he was not optimistic that regulators would allow it.

“Tele2 is a very attractive target but there are regulatory hurdles given our market share in the Netherlands and of course the price needs to be right,” he said. “But from an in-country consolidation perspective this is the ideal target for us.

“The regulatory hurdles are there and they are not easy to solve. It is on my agenda but I am really focused on getting our Dutch telco activities back on track.” (Editing by David Cowell)

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