* European Commission likely to closely scrutinise deal
* Divestment of some frequency bands possible
* Deal would reduce number of German operators to 3 from 4
By Foo Yun Chee and Leila Abboud
BRUSSELS/PARIS, July 24 (Reuters) - Telefonica maysucceed in evading possible a regulatory block on its 8.1billion euro ($10.7 billion) bid for KPN's German unitby offering to give up some assets, easing the entry of newplayers, antitrust experts say.
The Spanish telecoms group plans to buy the E-Plus unit ofDutch group KPN in a deal which would broadly put it on an equalfooting with market leaders Deutsche Telekom andVodafone in Europe's biggest mobile market.
The deal will reduce the number of mobile operators inGermany to four from three, a scenario that typically ringsalarm bells with regulators concerned that limited competitionwill drive up consumer prices.
Germany is already one of the most expensive mobile marketsin Europe and has lower than average smartphone penetration,according to an analysis by consultancy Rewheel.
German mobile leaders Vodafone and Deutsche Telekom enjoyoperating profit margins in mobile of 35 percent and 40 percentrespectively, compared with the low-20s achieved by carriers inBritain and low-30s in France.
Miranda Cole, a partner at Brussels-based Covington &Burling, said Telefonica's purchase of KPN's E-Plus unit wouldlikely face a tough review, but that concessions involvingspectrum and network capacity, as typical in telecoms mergers,should ease regulatory concerns.
"It's likely to be about spectrum - how much would they berequired to give up - and making sure that mobile virtualnetwork operators (MVNO) can continue to operate and makingentry through spectrum auction feasible," Cole said.
MVNOs are operators who rent access on bigger rivals'networks and tend to sell cheaper mobile plans, often without along-term contract and targeted at youth or ethnic niches.
In Germany, MVNOs hold a large chunk of the market andregulators could seek pledges from Telefonica to give themaccess on favourable terms as a condition of merger approval.
SPECTRUM ACCESS
E-Plus Chief Executive Thorsten Dirks said on Tuesday it waspossible that the groups would have to give up frequencies toget the deal approved, since they would have more spectrum thanrivals. [ID:nWEB008JS}
A person familiar with Telefonica's thinking said thecompany would argue to regulators that the deal would create astrong third operator with the firepower to invest heavily infaster mobile networks to compete with the market leaders.
"You have to assume that there will be spectrum divestmentsin the 1.8 and 2.1 gigahertz bands," the person said, referringto the mobile phone spectrum that the combined group will holdmost of.
"But beyond that there is no credible argument that bigconcessions are needed," the person said. "Plenty of competitionexists in Germany: there are three network operators but manyMVNOs and brands fighting it out for customers in the retailmarket."
Telefonica's bid comes amid efforts by the EuropeanCommission to create a single telecoms market across the27-nation European Union. That, however, is not likely to figurehigh in the antitrust appraisal of the deal, said professorChristopher Kummer at the Institute of Mergers, Acquisitions andAlliances.
"Even in a single telecoms market, you would like to avoidhaving only very few players around. And some former monopolistshave been extremely successful in defending their markets andmargins anyway," Kummer said.
The Commission's spokesman for competition policy, AntoineColombani, said on Tuesday the companies had not yet notifiedthe regulator of the deal.
As well as the European Commission, the German FederalNetwork Agency must approve the deal.
Vodafone (VOD)
