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* KPN sells unit for 5 bln euros cash, 17.6 pct of merged co
* Deal would combine third, fourth-place players in Germany
* Antitrust review expected to be tough
* Telefonica says deal won't affect net debt to EBITDA ratio
* To finance deal via cap hike at German unit plus debt
* Telefonica Deutschland plans 3.7 billion eur share sale
By Robert-Jan Bartunek and Clare Kane
BRUSSELS/MADRID, July 23 (Reuters) - Dutch telecoms groupKPN will sell its German unit to Telefonica for 8.1 billion euros ($11 billion) in cash and shares, in along-awaited deal that will test antitrust regulators' views inEurope's largest mobile market.
If KPN's disposal of E-Plus passes muster, the new companywould hold a share of about 30 percent of Germany's mobileservice revenue and would be better armed to take on DeutscheTelekom and Vodafone, with 35 percent each.
Telefonica said it expects the deal to close in the firsthalf of 2014, implying it expects an in-depth antitrust reviewby the European Commission.
KPN, which is 30 percent owned by Mexican tycoon CarlosSlim's America Movil, will receive 5 billion euroscash and a 17.6 percent stake in the newly merged company valuedat some 3.1 billion euros. Cost savings from the deal would bebetween 5.0 billion euros and 5.5 billion.
The price represents a multiple of 9.0 times E-Plus'sforecast core earnings, making it attractive to KPN given thesector average is currently at 4.7 times according toThomsonReuters data.
It was not clear if Slim backs the deal to sell KPN's crownjewel to Telefonica, his arch rival in Latin America. AmericaMovil has two seats on the KPN supervisory board and KPN did notsay if the vote was unanimous.
For Telefonica, which has been selling assets for the pasttwo years to cut its debts, the deal is a bold bet on Germany, amarket where despite recent intensified competition profitmargins remain high compared with Britain and Spain.
It also shows that the Spanish group's deleveraging effortshave paid off, putting it in a position to pull off an importantdeal in a key market, said people involved in the talks.
The two-stage deal is structured to minimise increases inTelefonica's debt by paying as much as possible in equity.First, Telefonica will issue 4.14 billion euros in debt -roughly 50 to 65 percent from hybrid debt, 20 to 30 percent froma mandatory convertible bond and the rest from incremental debt.
Then, once regulatory approval is secured, a 3.7 billioneuros rights issue would be carried out by TelefonicaDeutschland, to which Telefonica will subscribe for 2.84 billionto maintain its stake at 76.8 per cent.
Telefonica said it expected the deal would not affect itskey net debt to core earnings (EBITDA) ratio. Rating agencieshave not yet given their view on the deal.
DEAL SPREE
The two companies had flagged the deal late on Monday andsources earlier confirmed to Reuters the structure and price ofthe combination.
"As we have said for many years, we will sell any asset forthe right price," KPN Chief Executive Eelco Blok said. "For along time people have predicted this combination would happenand we're very, very pleased that we have reached an agreement."
The deal is the latest in a spate of acquisitions in theglobal telecom sector, which is reshaping an industry strugglingin Europe but flourishing in the United States and Asia whereprices and profits are higher.
Telecoms M&A is up 20 percent year-on-year, with 354 dealsworth $52.8 billion dollars announced as of July 18, accordingto data from Thomson Reuters.
Vivendi for instance also on Tuesday agreed to sella controlling stake in Maroc Telecom to Gulf operator Etisalat, while Japan's Softbank, Vodafone and cablegroup Liberty Global have all recently done deals.
Because of its size and cross-border implications, theEuropean Commission's antitrust watchdog will closely evaluatethe deal's impact on consumers and network quality in Germany.
In recent deals, such as in Austria where operators soughtto reduce the number of players to three from four, regulatorshave demanded concessions such as spectrum divestments andpledges to offer competitive rental terms to rivals.
"In an environment where in-market consolidation has beenput under intense regulatory scrutiny ... we believe such a dealwould face significant hurdles in principle, even beforediscussing potential concessions," wrote analyst Ulrich Rathe atbrokerage Jefferies.
A person involved in the deal said Telefonica and KPN didnot sounded out regulators on the deal, which came together inthe past month. Some spectrum divestments were likely, theperson added, but the German market would remain competitivewith three operators since multiple brands vie for customers.
AUCTION LOOMS
For KPN, the deal is an acknowledgement that it could nolonger fight it out in Germany's increasingly competitivemarket. The cash-strapped operator missed out on buying the bestkind of fourth-generation mobile spectrum, leaving it as adisadvantage to rivals offering faster mobile data plans.
Instead it went on the attack in January, cutting prices andtouching off a market share land-grab that sapped its ownprofits as well as that of other telcos in the once-cosy market.
The Dutch group's openness to a deal also increased when theGerman regulator decided the next spectrum auction would notinclude the kind of spectrum KPN needed for at least another twoyears, said people familiar with the talks.
Telefonica made an initial approach after KPN completed itscapital increase in May and an agreement was reached in a matterof weeks, said people involved in the talks.
One person involved in the talks said KPN saw it as a goodtime to sell given E-Plus's weak market position.
"Slim and KPN know they will never get as good a price forthis asset as they will get right now," the person said. "Thecompetitive environment in Germany is getting worse ... E-Plusis in an unsustainable position in Germany - too small, too fewspectrum holdings and (an) inability to invest."
On a conference call, KPN boss Blok refused to explainAmerica Movil's position, only adding that the Mexican group hadtwo members on the supervisory board which approved the deal.
KPN said it would use the majority of the cash proceeds toimprove its balance sheet and would restart paying a dividendfor 2014. That means Slim, who is nursing huge paper losses onhis roughly 4 billion euro investment in KPN, cannot even counton getting a share of the sale proceeds this year.
KPN, which has some 24 million customers in Germany, saw itscore profit decline by 30 percent in the country, adjusted forone-off items, in the second quarter as it lowered its prices toattract new customers.
At group level, core profit, adjusted for one-offs, fell 11percent in the quarter to 1.08 billion euros, above the 991million expected in a Reuters poll of 10 analysts.
KPN said JP Morgan, Goldman Sachs, ABN AMRO and law firmAllen & Overy were its advisors.
Telefonica was advised by Citigroup, HSBC and MorganStanley, which will also be carrying out the financing of thedeal, according to people familiar with the matter.
UBS was joint advisor to Telefonica Deutschland alongsideBank of America Merrill Lynch.
