United Internet and Drillisch to merge German telecoms services

United Internet's 1&1 Telecommunication unit will merge with Drillisch's mobile business to create a company with 12 million customers and combined turnover of €3.2 billion in 2016, the companies said. Germany currently has three major full-service telecoms providers: Deutsche Telekom, Vodafone and Telefónica.

The merger is planned to take place in two steps. First, United Internet will transfer around 7.75% of its shares in 1&1 Telecommunications to Drillisch in return for 9,062,169 new Drillisch shares. This will increase United Internet's interest in Drillisch from 20.08% currently to just over 30%, the companies said.

In the second step, United Internet's remaining interest of around 92.25% shares in 1&1 Telecommunication will be exchanged in return for 107,937,831 new Drillisch shares coming out of a second capital increase, giving United Internet a share of approximately 72.7% in Drillisch.

The plans will be presented at a Drillisch extraordinary general meeting on 25 July, and need a majority of 75% of the represented capital, the companies said.

Drillisch shareholders will be asked to choose whether they want to continue to hold Drillisch shares, or to sell them for €50.00 per share, which is 8.2% more than the volume-weighted average share price of Drillisch shares over the three months prior to 11 May, the companies said.

Once the deal is complete United Internet will be Drillisch’s new majority shareholder with a share of at least 72.7%. United Internet would fully consolidate the merged business in its annual and quarterly financial statements. Drillisch will remain an independent listed company.

Ralph Dommermuth, chief executive of United Internet, said: "Together, we can offer our customers the complete range of products with full access to the network technologies of today and tomorrow from a single source: high-speed DSL, mobile internet and the associated services."

Munich-based M&A expert Eike Fietz of Pinsent Masons, the law firm behind Out-Law.com, said: "According to the press release, the transaction will create substantial synergies, particularly through joint purchasing of hardware and services, more efficient use of Drillisch’s available network capacity, the expansion of the 1&1 product portfolio to include future technologies, and the availability of a larger product portfolio in Drillisch’s stores."

"But in fact it seems that this deal is mostly about the use of Drillisch's contracted network capacity. Berenberg Bank said back in 2015 that such a transaction would make sense for United Internet. Following the acquisition of E-Plus by Telefónica Deutschland, Drillisch received the right to use up to 30% of Telefónica Deutschland's network capacities and has the option to extend this arrangement until 2030. Drillisch currently doesn't have the customers to get much use out of the capacities under contract, but together with the 1&1 business it would," Fietz said.