German Internet service provider United Internet plans to buy a majority stake in mobile operator Drillisch in a staggered stock and cash deal which will boost competition at the low end of the crowded German telecoms market.
United Internet plans to combine Drillisch and its own 1&1 consumer fixed-line and mobile business within the group, maintaining Drillisch’s independent listing and “attractive” dividend policy, the companies said yesterday.
The proposed transaction values the 1&1 Telecommunication retail business at €5.85bn ($6.36bn) and will create a business with annual sales of more than €3.2bn and more than 12mn customers, the companies said.
That would put it in fourth place behind Deutsche Telekom, Vodafone and Telefonica Deutschland, all of whom have their own mobile networks.
Drillisch has extensive access to Telefonica’s mobile network.
The total transaction has a value of more than 8bn euros, excluding debt, making it the biggest M&A deal announced in Germany so far this year.
Incuding synergies a company worth more than 10bn will be created, a person familiar with deal told Reuters.
“The combination with 1&1 Telecommunication is a tremendous opportunity for Drillisch and our shareholders and is a leap for our company into a completely new dimension,” Drillisch chief executive Vlasios Choulidis said.
“In terms of sales, Drillisch will be about five times as large as it is today.”
Drillisch said that Choulidis would step down from operational management and become chairman of Drillisch’s supervisory board if the transaction goes through as planned.
The combined company would be led by Drillisch finance chief Andre Driesen, as well as 1&1 Telecommunication CEO Martin Witt and United Internet Chief Executive Ralph Dommermuth.
The companies aim to execute the deal through two capital increases by Drillisch to buy a stake in and then acquire all of 1&1, consequently lifting United’s stake in Drillisch in exchange.
Drillisch will initially sell 9mn new shares to buy 7.75% of 1&1 Telecommunication, which will take United Internet’s stake in Drillisch to a little more than 30% from 20% and trigger a full takeover offer.
That offer will be at €50 per share, which the companies said represented a premium of 8.2% over Drillisch’s three-month volume-weighted average share price.
The offer is expected to run from the end of May to the end of June.
Drillisch would then buy the rest of 1&1 Telecommunication for 108mn new Drillisch shares, in exchange for which United’s stake in Drillisch would rise to 72.7%. Shares in Drillisch were up 8.7% in early trade at €52.77 and above United Internet’s offer price.
Shares in United Internet rose 11.6% to the top of the German TECDAX.
Telefonica Deutschland shares were up 5.4%.
“This transaction represents the logical next step in the consolidation of retail branding and commercial capacity in the crowded German mobile market,” said Dhananjay Mirchandani an analyst at Bernstein.
In Germany, there were around 122mn activated mobile SIM cards at the end of last year, in a population of about 80mn people, according to the Federal Networks Agency.
Bernstein’s Mirchandani added that competition on the German market would increase in the near term, threatening Telefonica Deutschland and Vodafone’s price sensitive products.
“Deutsche Telekom is best positioned to weather the heightened near-term competitive intensity due to the strength of its second brand Congstar,” he said.
Deutsche Telekom shares were 1.3% higher yesterday at the top of Germany’s blue chip index.
The two companies said they envisaged annual savings of 150mn euros from 2020, rising to €250mn by 2025, and costs of 50mn euros for the transaction.
Bank of America Merrill Lynch advised Drillisch on the deal and JP Morgan was United Internet’s adviser.