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Germany to Get 'Strong Fourth Player' With UI's Drillisch Takeover

Iain Morris
5/12/2017
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Germany's United Internet is aiming to create a "strong fourth player" in the country's telecom market by acquiring a majority stake in mobile operator Drillisch and merging the company with its own 1&1 retail subsidiary.

The proposed deal values 1&1 at about €5.85 billion ($6.4 billion) and would create an operator with both fixed and mobile capabilities serving more than 12 million customers and generating annual revenues of more than €3.2 billion ($3.5 billion).

That would put it behind Deutsche Telekom AG (NYSE: DT), Vodafone Germany and Telefónica Deutschland GmbH in the German telecom market and threatens to increase the competitive and pricing pressure on the existing players.

Shares in United Internet AG (UI) soared on news of the plan and were trading up 11.5% in Frankfurt, at €47.60 ($51.75), at the time of publication.

UI already owns a 20.8% stake in Drillisch and plans to become the majority owner through two capital increases.

In the first, UI will transfer 7.75% of its shares in 1&1 to Drillisch -- a move that will increase its stake in Drillisch to around 30%.

That will spark a full takeover of 1&1 by Drillisch, with UI transferring its remaining 92.25% stake in exchange for 107,937,831 new Drillisch shares.

The transaction would ultimately leave UI with a 72.7% stake in Drillisch.

UI said that "short-term investors" in Drillisch would also have the option of tendering shares at the price of €50 ($54) per share, which is 8.2% more than the average share price of Drillisch over the past three months.

Shares in Drillisch were trading at €52.66 ($57.25) in Frankfurt at the time of publication, up 8.35% on their closing price on May 11.

Drillisch secured capacity on Telefónica's mobile network as a regulatory condition of a earlier merger between Telefónica and E-Plus, the previous number-four player, and has been a thorn in the side of its larger mobile rivals ever since.

Its revenues were up 21.3% in the first three months of the 2017, to €151.1 million ($164.3 million), compared with the year-earlier period, with EBITDA rising 46.3%, to €35.1 million ($38.2 million).


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UI claims to operate Germany's second-biggest fiber-optic network, after Deutsche Telekom, but its 1&1 subsidiary relies heavily on the German incumbent's local loop facilities to provide residential broadband services.

In the mobile market it has wholesale agreements in place with both Vodafone and Telefónica.

It has also been growing at a much faster pace than the big three players, reporting a 6.2% year-on-year increase in first-quarter sales, to €619.4 million ($673.4 million), and a 12.9% rise in EBITDA, to €109 million ($118 million).

UI said it expected to realize annual "synergies" of €150 million ($163 million) by 2020 as a result of the merger and reckons these will increase to as much as €250 million ($272 million) by 2025.

It expects to see benefits from joint procurement, more efficient use of network capacity and the expansion of the product portfolio, although it faces what it calls "one-off implementation costs" of about €50 million ($54 million).

The wholesale agreement with Telefónica will be critical to the success of the merger plans, said the companies.

"It ensures us full access to next-generation network technologies for the coming years -- and on very good terms," said Vlasios Choulidis, the executive-board spokesman for Drillisch, in a company statement. "The share of the network that we have exclusive rights to use increases every year -- up to 30% in 2020. And thanks to our renewal options, we have this right until at least 2030."

While rival operators often welcome any consolidation, UI's plans could generate fresh competition in the market for "converged" services that bundle fixed and mobile offerings in a single bill.

The new-look 1&1 business would remain a lot smaller than any of the big three, but it would certainly not be a minnow with annual revenues of about €3.2 billion ($3.5 billion).

Telefónica, the number-three player, made about €7.5 billion ($8.2 billion) in revenues in Germany's fixed and mobile markets last year.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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Gabriel Brown
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Gabriel Brown,
User Rank: Light Sabre
5/24/2017 | 5:42:40 AM
Re: stay strong
I developed another name for this (while working with a client): a challenger operator

;)
mendyk
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mendyk,
User Rank: Light Sabre
5/23/2017 | 2:36:53 PM
Re: stay strong
At some point, this has to be about more than consumers. There has to be a case for a sustainable business as well. This site is ostensibly focused on CSP issues. From a CSP perspective, it's hard to justify investing in building and running a network if the best-case scenario is 20% market share. MVNOs are a different story.
kq4ym
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50%
kq4ym,
User Rank: Light Sabre
5/23/2017 | 1:56:47 PM
Re: stay strong
But nonetheless, it can't be all bad if the new business "threatens to increase the competitive and pricing pressure on the existing players," and thus help out the customers and provide incentive for better service and speeds?
James_B_Crawshaw
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50%
James_B_Crawshaw,
User Rank: Blogger
5/13/2017 | 9:45:58 AM
Re: stay strong
Yep. With a combined 7.7m mobile subs they'll now have 6% market share in Germany. The key thing for United Internet is that it gives them access to 4G through Drillisch's deal with O2 Germany (which was a condition of the E+ merger). Without 4G (which no one was obliged to make available to United Internet) their mobile business was moribund. 
mendyk
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50%
mendyk,
User Rank: Light Sabre
5/12/2017 | 10:11:23 AM
stay strong
"Strong fourth player" -- that's telecom's equivalent to the runner-up for Miss Congeniality.
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