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* German market to have three instead of four mobile networkoperators
* Telefonica must sell spectrum, rent out network capacity
* Approval seen encouraging further mobile consolidation inEuropean telecom markets (Adds details, company comment, background)
By Robert-Jan Bartunek and Harro Ten Wolde
BRUSSELS/FRANKFURT, July 2 (Reuters) - European regulatorshave cleared Telefonica's bid to consolidate the Germanmobile market by buying smaller rival KPN's E-Plus for8.6 billion euros ($11.7 billion), raising prospects of moredeals to come across Europe's telecoms markets.
The European Union's powerful antitrust chief JoaquinAlmunia said on Wednesday that Telefonica agreed to concessions- including selling some radio spectrum and renting out capacityon its network to smaller rivals - to ensure that the deal doesnot lead to higher prices for customers.
The remedies are similar to those agreed by HutchisonWhampoa in May when its 3 Ireland subsidiary wonapproval to buy the Spanish group Telefonica's O2 Ireland forabout $1 billion.
Analysts said approval of the much bigger German deal could encourage operators in Italy, Spain and France to move aheadwith similar mergers in those markets.
"We have to take a close look at the remedies but this seemsto be a blueprint for other potential deals in Europe," saidanalyst Adrian Pehl at Equinet Bank.
Facing demands to invest in faster networks, Europeantelecom groups say they need to get bigger to cope with fiveyears of revenue declines. They argue that the region'sfragmented market - which features more than 100 fixed andmobile groups compared with a half dozen in the United States -leads to price wars and poorer-quality service for consumers.
Combining Telefonica Deutschland and KPN's E-Pluswill create Germany's largest mobile operator by customers witha market share of roughly 31 percent, giving Telefonica moreclout in its battle with Vodafone and DeutscheTelekom's T-Mobile.
Telefonica Deutschland said E-Plus's chief executiveThorsten Dirks will take over as CEO of the new group.
The deal comes just as the German market, Europe's largest,has got even more competitive. Budget-oriented E-Plus has beenwinning customers at the expense of Vodafone despite havingpoorer network coverage and little high speed 4G mobilebroadband.
KPN's shares were down 1.8 percent at 2.59 euros at 1452GMT, while Telefonica Deutschland rose 2.3 percent to 6.24 eurosand Telefonica fell 1 percent to 12.53 euros.
FOUR TO THREE
As a condition of approval, the European Commission insistedthat Telefonica rents out up to 30 percent of the mergedcompany's network capacity and divest some spectrum in the 2.1GHz and 2.6 GHz frequency bands to allow the potential entry ofnew operators in the future.
Telefonica will also extend current wholesale agreements andoffer 4G capacity to anyone that wants to offer such services.
The Commission said these measures would allow for up tothree new mobile virtual network operators (MVNOs) to enter themarket. MVNOs are already strong in Germany, selling cheaperplans often aimed at young people or immigrant populations.
Telefonica has already signed a deal with one virtualoperator, Drillisch.
"The remedies to which Telefonica commits ensure that theacquisition of E-Plus will not harm competition in the Germantelecoms markets," Almunia said in a statement.
It remains to be seen how the German market, where mobileprices are amongst the highest in Europe, will be affected bythe reduction from four to three carriers. A similar deal inAustria last year - a smaller market with initially low prices -did lead to price rises despite the buyer Hutchison agreeing tohost virtual operators on its network.
Vodafone and Deutsche Telekom expressed concern that theconcessions forcing Telefonica to give favourable conditions tovirtual operators went too far.
Telecoms consultant John Strand questioned whether evenbeefed up virtual operators would be a real force againstTelefonica, Vodafone, and Deutsche Telekom.
"Drillisch is not what you can call a player with success,"said Strand. "If I was Telefonica I would be happy, Drillischwill probably not be able to sell the traffic Telefonica have tooffer to them."
Deutsche Telekom said that the merger would generate "amassive" imbalance at radio frequencies above 1 gigahertz.Vodafone also said it wanted the German regulator "to take backsignificant amounts of the merged entity's spectrum."
Overall though Europe's telecom sector will see thecommission's softer approach on natonal market mobile mergers asa positive step won after several years of tough lobbying.
"Allowing companies to operate at an efficient scale is thefirst step towards increased network investments and increasedquality services for European consumers," said LuigiGambardella, who heads ETNO, the telecom operators' trade group. ($1=0.7331 euros) (Additional reporting by Hannah Boland, Leila Abboud in Paris,and Kate Holton in London; Editing by Tom Pfeiffer and GregMahlich)
