EUR 850.00 For Business Accounts Only

Morningstar | Updated Telefonica Deutschland

We believe Telefonica Deutschland's acquisition of E-Plus was a strong strategic move. Rather than fighting each other and mobile virtual network operators, or MVNOs, at the low end of the price range, the combined firm is now focusing on adding higher-value customers. It now has more subscribers than Deutsche Telekom or Vodafone and has significantly improved its spectrum position. E-Plus was in a particularly weak position, as it received no spectrum in the 800 megahertz auction in 2012, although to counter this loss, it acquired significant amounts at 2,100 MHz. After the deal, a much broader and deeper spectrum position should allow the firm to be much more competitive. Furthermore, the combined subscriber base also provides greater scale, allowing fixed costs to be spread over more customers, reducing the firm's cost per subscriber. So far, cost-cutting from the merger is ahead of schedule.We anticipate that the combined company will be able to compete more effectively against the other two full operators and steadily improve the quality of its customer base and average revenue per user. That said, we doubt the quality of its network will ever reach that of Deutsche Telekom and Vodafone, as they have increased capital expenditure spending to further improve the quality of their networks, and as Telefonica Deutschland is subject to regulatory requirements to sell up to 30% of its network capacity to Drillisch, an MVNO. This requirement makes it difficult to compete on quality, as the MVNO can resell its service at a discounted price.The big risk to the firm is convergence. The company has no fixed-line assets and is totally reliant on reselling capacity from Deutsche Telekom in order to provide a bundle of services. While convergence of fixed-line and wireless has been less common in Germany than some other European countries, Deutsche Telekom has increased its focus on selling its MagentaEins quad-play product, which is gaining traction. Vodafone is also increasingly marketing a quad-play service now that it has integrated its acquisition of Kabel Deutschland and Liberty Global has added a wireless service, as an MVNO.