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Telefonica Expands DTS Offer, as EC Nears E-Plus Verdict

BRUSSELS (The Deal) -- As EU competition regulators meet representatives of EU governments behind closed doors in Brussels Wednesday to discuss Telefonica's (TEF - Get Report) 8.55 billion euros ($11.6 billion) bid for Royal KPN's E-Plus carrier in Germany, the Spanish telecoms giant maneuvered to seal a takeover in its home market.

Telefonica announced an offer to buy Mediaset's 22% stake in Spanish pay-TV provider Distribuidora de Television Digita, or DTS, for 295 million euros, though it's not yet certain whether Mediaset will waive a preferential right to buy the 56% DTS stake held by Promotora de Informaciones SA, or Prisa, which has already agreed to sell its DTS stake to Telefonica.

Securing the European Commission's approval for the E-Plus purchase is also not yet a done deal, and representatives from several member states including Germany, the U.K., Austria and Ireland were expected to voice concerns over that deal at Wednesday's meeting. Representatives from Germany's Federal Cartel Office, which had sought to review the case itself, were due to attend.

While so-called advisory committee meetings are largely a formality, they allow all 28 EU governments a final chance to express their views on a Phase 2 case before regulators put the decision to a vote before the European Commission.

The deal would reduce the number of mobile operators in Germany from four to three. Most concerns surround getting the concessions right after Hutchison Whampoa's failure last year to find buyers for radio spectrum in Austria. The spectrum offer was one of the conditions for securing EC approval for its purchase of Orange Austria Telecommunication GmbH from Mid Europa Partners -- another deal which cut the number of country operators from four to three.

The EC is also expected to give conditional approval to Telefonica. Under pressure to find upfront buyers for its network capacity, the Spanish company is reportedly in talks with Freenet AG, United Internet AG and Drillisch AG, three of Germany's so-called mobile virtual network operators which provide wireless communications services without owning any infrastructure.

"We don't expect the Commission to change its mind," said a source close to the case, "but one can always hope that they will listen to the criticisms and concerns."

Regulators have until July 7 to wrap up their in-depth probe, which has had several starts and stops since it was opened last December.

Although German authorities had requested permission to vet the case themselves, the EC denied the request, saying at the time that it was better-placed to deal with the case because of its experience assessing telecoms mergers and the need for a consistent application of merger rules across the EU.

In the meantime, Telefonica remains active on the acquisitions front. Besides offering 295 million euros for Mediaset's 22% stake in DTS, Telefonica said that Mediaset would receive an additional 10 million euros if Telefonica successfully closes its acquisition of Prisa's 56% stake in DTS, and up to 20 million euros extra depending on increases in pay-TV customers over the next four years, as Telefonica looks to expand in TV to offset its sagging domestic telecommunications business.

The deal for Prisa's 56% DTS stake is worth 750 million euros and is contingent on both antitrust approval and clearance from a panel of Prisa lenders.

Mediaset, Italy's largest commercial broadcaster, is part of the media empire of former Italian prime minister Silvio Berlusconi.

If Mediaset accepts Telefonica's offer, then it will also waive a preferential right to acquire Prisa's stake in DTS. In return for the waiver, Mediaset will receive an extra 30 million euros from Telefonica.

In a Wednesday research note, analyst Andrea Devita, of Banca Akros SpA, in Milan said that while the latest offer has positive financial implications for Mediaset, it is "less straightforward from a strategic angle."

The analyst recommends holding Mediaset shares, with a price target of 3.30 euros. 

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