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UI gains control of Drillisch to form fourth German converged operator

Consolidation has been the name of the game in the German market, with the merger of Telefonica’s O2 with KPN’s E-Plus, and Vodafone’s acquisition of leading cableco Kabel Deutschland. The argument used to justify such deals to competition regulators usually centers on creating a stronger challenger to the incumbent, Deutsche Telekom. That is being rehearsed again by fiber provider United Internet (UI), which says it will create a “strong fourth player” by acquiring a majority stake in mobile operator Drillisch.

The broadband provider will merge Drillish with its own 1&1 retail broadband subsidiary to create a fixed/mobile operator under that brand, with a customer base of about 12m and annual revenues of more than €3.2bn ($3.5bn). It will be in fourth place behind DT, Vodafone and Telefonica Germany, but both its halves have been enjoying faster growth rates than the larger companies. UI has Germany’s second largest fiber network, after DT, but 1&1 relies heavily on the incumbent’s local loop facilities to provide residential broadband.

UI already owns a 20.8% stake in Drillisch. It will take control in two stages – it will transfer 7.75% of its shares in 1&1 to Drillisch first, taking its stake to about 30% and triggering a full takeover. In stage two, UI will transfer the remainder of its shares in 1&1 in exchange for 107,937,831 new Drillisch shares. That will give it a 72.7% holding in the mobile player.

Drillisch entered the mobile market thanks to a regulatory condition of allowing the O2/E-Plus merger. The competition authority said that, to mitigate the effect of reducing the number of MNOs from four to three, Telefonica must offer capacity for a new mobile player on an MVNO basis. The newcomer has been making strong headway since, with its revenues rising by over 21% year-on-year in the first quarter of this year to €151.1m ($164.3m). UI itself has wholesale mobile agreements with both O2 and Vodafone.

Vlasios Choulidis, the executive board spokesman for Drillisch, said in a statement that the MVNO deal with Telefonica “ensures us full access to next generation network technologies for the coming years, and on very good terms. 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.”

UI said it expected to realize annual synergies of €150m ($163m) by 2020, and €250m ($272m) by 2025, from the merger.

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