Tuesday, April 29, 2008

Freenet and Debitel

Freenet Buys Debitel; Becomes World's Biggest MVNO

Freenet pays US$2.55 billion for Debitel to become Germany's third-largest mobile services provider.

Global Insight Perspective

Significance - The merger of Freenet and Debitel will create Germany's third-largest mobile services provider and the world's biggest MVNO.

Implications - By merging with Debitel, Freenet has altered the dynamics of its relationship with United Internet and Drillisch, making a buyout of Freenet less likely.

Outlook - Given the aggressive competition in the German mobile market, the merger of Freenet and Debitel heralds the long-awaited consolidation in the market and may help ease the pressure on pricing.

German telecom group Freenet is set to become Europe's largest MVNO after buying rival Debitel in a 1.63-billion-euro (US$2.55 billion) deal from private-equity group, Permira. Freenet sealed the deal on Sunday (27 April) despite strong opposition from major shareholder, United Internet. Following the deal, the combined mobile customer base of Freenet and Debitel will reach 19 million, making Freenet Germany's third-largest mobile services provider, and one of the largest MVNOs in the world.

In a statement, Freenet said its supervisory board approved the purchase, subject to antitrust approval by the German cartel authority. Given that Debitel will be acquired on a cash-free basis with financial liabilities of about 1.135 billion euros, Freenet noted that it will not pay a dividend in 2008. Under the terms of the deal, Permira will receive 32 million new Freenet shares, giving it a 24.99% stake in the company. Permira will also provide a 132.5-million-euro, long-term loan to Freenet and has agreed to a structured lock-in period for its new shares.

Outlook and Implications

* Rumblings within Freenet: The acquisition of Freenet represents another chapter in the ongoing uncertainties over the fate of Freenet. The company's major shareholder, United Internet, which jointly controls 25.24% via its holding company with Drillisch, vehemently opposed the deal and tried to raise its bid price for Freenet. United Internet has been vacillating over launching a proposal to fully takeover Freenet. United Internet had wanted to buy up all of Freenet, break it up, take its DSL business, and allow rival MVNO, Drillisch, to take the mobile operations. Such was United Internet's desire to scupper the Freenet-Debitel deal that, according to Reuters, it offered to raise its takeover bid for Freenet to 16 euro per share from 12.80 euro per share.

* Long-Awaited Consolidation Arrives: Although United Internet and Drillisch are not yet in the picture, the merger of Freenet and Debitel heralds the long-awaited consolidation in the German mobile market. Freenet was born when MobilCom merged its mobile operations and its internet arm, Freenet, in March 2007. In turn, Debitel Germany is the local operation of pan-European MVNO Debitel Group. The company snapped up TDC's German operations, Talkline in June 2007, and in July 2007, sold off its French unit to SFR as part of a plan to focus on the German market. By combining their mobile subscriber numbers, the combined Freenet and Debitel firm will become Germany's third-largest mobile services provider, well ahead of KPN's E-Plus and Telefónica's O2, but still well-short of market leaders T-Mobile and Vodafone. Also, the combined 19 million subscribers make Freenet the largest MVNO in the world, well ahead of Tracfone in the United States. Importantly though, consolidation in the German mobile market may help reduce aggressive competition, lowering the pricing pressures which have affected most of the players.

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