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* European Commission likely to closely scrutinise deal
* Divestment of some mobile spectrum seen likely
* Would reduce number of German operators to 3 from 4
* Telefonica-KPN tie-up seen a watershed for European sector
By Foo Yun Chee and Leila Abboud
BRUSSELS/PARIS, July 24 (Reuters) - Telefonica islikely to persuade regulators to clear its 8.1 billion euro($10.7 billion) bid for KPN's German mobile telecomsbusiness by giving up some spectrum and easing the entry of newcompetitors, antitrust experts said.
The Spanish company's acquisition of KPN's E-Plus wouldbroadly put it on an equal footing with leaders Deutsche Telekom and Vodafone in Europe's biggest mobilemarket and reduce the number of operators to three from four.
That scenario typically rings alarm bells with regulatorsconcerned that less competition will drive up prices forconsumers.
Miranda Cole, a lawyer at Covington & Burling, said the dealwould run into some opposition, but that concessions on spectrumand network capacity should ease regulatory concerns.
"The deal is certainly going to get close scrutiny becauseGermany is the biggest mobile market in Europe," she said. Ithas around 110 million subscribers.
"It's likely to be about spectrum - how much would they berequired to give up - and making sure that mobile virtualnetwork operators (MVNOs) can continue to operate and makingentry through spectrum auction feasible."
MVNOs do not own networks and often sell cheap mobile planswithout long contracts, targeted at certain customers such asyoung people or ethnic groups. Regulators could seek pledgesfrom Telefonica to rent access to MVNOs on favourable terms.
However, regulators may also be influenced by the fact thatGermany is already one of the most expensive mobile markets inEurope and has lower-than-average smartphone penetration.
A monthly plan with 2 gigabytes of mobile data costs 39euros, compared with 20 euros in France and 15 euros in Britain,according to consultancy Rewheel.
Vodafone and Deutsche Telekom enjoy profit margins in Germanmobile of 35 percent and 40 percent respectively, compared withthe low-20s for carriers in Britain and low-30s in France.
SPECTRUM
Telefonica's strategy will be to offer enough concessions tosecure approval without cutting too deeply into the benefits ofbuying KPN's E-Plus. The company expects the deal to boostprofits by cutting between 5 to 5.5 billion euros of costs.
A person familiar with Telefonica's thinking said thecompany would argue the deal, announced on Tuesday, would createa strong third operator with the firepower to invest heavily infaster mobile networks to compete with the market leaders.
It would have 43 million customers, more than DeutscheTelekom's 37 million and Vodafone's 36 million. It would hold 31percent of mobile revenue, said Citigroup, less than Deutsche's34 percent and Vodafone's 35 percent.
"You have to assume that there will be spectrum divestmentsin the 1.8 and 2.1 gigahertz bands," the person said, referringto the mobile spectrum that the new group will hold most of.
"But beyond that there is no credible argument that bigconcessions are needed," the person said.
E-Plus Chief Executive Thorsten Dirks said on Tuesday thegroups may have to give up frequencies to get the deal approved,since they would have more spectrum than rivals.
If Telefonica does give up spectrum, it runs the risk thatthe regulator could then sell it to a new company. Since Germanyis holding another mobile licence auction in 2014 or 2015, anewcomer or cable group Liberty Global may buy enoughspectrum to launch a competing mobile service.
In Austria, regulators told Hong Kong-based Hutchison to give back spectrum to get its purchase of Orange's local business approved, and will seek to resell itnext year.
RAISED HOPES
Telecom bosses have lobbied heavily this year for Brusselsto take a softer line on mergers, arguing that Europe has toomany operators labouring under heavy regulation that saps theirability to invest in networks.
Neelie Kroes, EU commissioner for the digital agenda whowants a single market for telecom services across the 28-nationEuropean Union, is receptive to their argument.
But the EU's top antitrust regulator Joaquin Almunia is moreskeptical that telecom groups will actually pump money intobetter networks and services if they are allowed to get bigger.
Neal Milsom, the finance chief of EE, Britain's largesttelecom operator, said he hoped the regulator's stance on theTelefonica deal would be a watershed.
"There is a really compelling case that you can get thebest of both worlds: a great offer and service for customers butalso a sustainable and profitable industry as well," he said.
A similar four-to-three deal with Hutchison buying Telefonica's Ireland unit is also now up for EU review,as is Vodafone's acquisition of Germany's Kabel Deutschland.
Despite Brussels' eagerness to foster a single telecommarket in Europe, the idea is not likely to affect antitrustreviews, said professor Christopher Kummer at the Institute ofMergers, Acquisitions and Alliances.
"Even in a single telecoms market, you would like to avoidhaving only very few players around," Kummer said.
