Is merger fever spreading to European telcos?: KPN in talks with Telefonica

Reports that Spain-based Telefonica currently is in talks with Dutch provider KPN about a possible merger is sparking speculation that it could lead the way toward further European consolidation as carriers on the continent attempt to compete globally.

According to Spain's El Mundo daily newspaper, the companies were considering a 60/40 joint venture, in which Telefonica would hold the leading stake. KPN declined to comment but issued a statement confirming the talks, which if completed would be the first merger between two incumbent European carriers.

Behind the urge to merge are pending wireless license auctions in Western Europe, which are forcing European carriers to decide how to gather the funds to play in the global market, said Rolf De Vegt, vice president of Renaissance Strategy. "KPN and Telefonica's senior managers are realizing they are too small to survive in the end," he said.

But the carriers also have shareholders and stakeholders who do not realize that and want to remain independent, De Vegt said. "The challenge is they know they need to act, but they have lots of things holding them back. Even though it's a financial and strategic fit, just making it work culturally will be a challenge."

A more culturally palatable version of the merger may involve initially combining only parts of the companies such as their mobile divisions. At the end of April, KPN delayed the IPO of KPN Mobile, the company's mobile division. In addition, both companies have separately stated their desires to bid for Orange, leading to projections that the two might take the U.K.-based service provider. Together they may hope to grab a larger share in the global market, said Bill Hahn, program manager for telecom strategies in direction for Dataquest's worldwide division.

If Telefonica did acquire KPN, it would move the Spanish carrier from 12th to seventh place in a ranking of worldwide carriers, Hahn said. "While [European carriers] don't all directly compete, they see the need to compete in the global market."

On the regulatory front, the two carriers could be small enough to avoid troubles, said Peter Crowcombe, research analyst for Infonetics Research. "But there's bound to be some investigation," he added. "Over the next five years, there is going to be considerable consolidation in Europe because of new entrants like KPNQwest."

As mobile providers, the two companies still will not have Pan-European coverage, with Italy and France remaining significant gaps in coverage. But on the wireline side, with KPNQwest in Western Europe, Telefonica's strength in Latin America and Qwest's power in North America, a global carrier is taking shape, De Vegt said.