German telco says deal will help it mount challenge to Deutsche Telekom, Telefonica, Vodafone.

United Internet late last week agreed to merge its telco business with mobile player Drillisch, creating a fourth-integrated operator that can compete with Deutsche Telekom, Telefonica and Vodafone.

The combined company has 12 million customers and generated €3.2 billion in revenue last year. The deal is expected to generate annual synergies of €150 million by 2020, rising to €250 million by 2025.

"Together with Drillisch, we will be able to offer our customers an even more extensive portfolio of products," said Martin Witt, CEO of United Internet’s telco arm, 1&1 Telecommunication.

Drillisch operates MVNO services hosted on Telefonica Germany’s network. In 2014, it struck a deal to acquire 20% of Telefonica’s mobile spectrum over a period of five years, as part of a remedy package applied to Telefonica’s acquisition of rival E-Plus. Drillisch also has the option to purchase an additional 10% at a later date.

Meanwhile 1&1 offers DSL broadband, and mobile services; it has around 8.7 million customers.

"The combination with 1&1 Telecommunication is a tremendous opportunity for Drillisch and our shareholders, and is a leap for our company into a completely new dimension," said Vlasios Choulidis, Drillisch’s executive board spokesman. "In terms of sales, Drillisch will be about five times as large as it is today. Furthermore, the synergies we achieve will enable us to further increase our profitability."

Drillisch’s finance director Andre Driesen, as well as Witt and United Internet CEO Ralph Dommermuth, will lead the combined company after the merger closes, which is expected to happen by the end of the year. Choulidis will step down.

United Internet is already Drillisch’s biggest single shareholder, with a stake of 20.08%. The deal struck last Friday will increase its holding to at least 72.7%.

The transaction will see United Internet transfer 100% of 1&1 to Drillisch in return for 117 million new Drillisch shares.

The merger will take place in two stages.

Stage one involves the transfer of 7.75% of 1&1 in return for 9.06 million new shares. The remaining 92.25% will be transferred in stage two in return for 107.9 million new shares. The latter requires the approval of Drillisch shareholders representing at least 75% of Drillisch’s capital.

In addition, United Internet will make a voluntary tender offer for all outstanding Drillisch shares. The offer values each share at €50, an 8.2% premium on the average price during the three months to 11 May.

When the dust settles, United’s stake in Drillisch will have increased to 72.7%, plus however many shares are acquired through the tender offer.

United Internet CEO Ralph Dommermuth said the deal is a win-win for both companies.

"United Internet shareholders will benefit from the significant increase in our strategic stake in Drillisch. Drillisch shareholders will benefit from substantial opportunities for synergies and growth if they keep their shares and vote in favour of the joint project at the extraordinary general meeting. As an alternative, short-term investors may tender their shares at a price close to the all-time high," he said.